SEC switches to 'Plan B' for proxy access

Mary Schapiro, chairman of the Securities and Exchange Commission, was forced to resort to her fallback plan for giving shareholders more say in corporate governance.

Schapiro announced Wednesday she won't seek a rehearing of a July ruling by a federal appeals court striking down an SEC rule that would have required public companies to include dissident shareholder nominees in their corporate proxies. Instead, she said the agency would move forward with an alternative that at least gives investors the right to fight for a non-binding resolution recommending that dissident nominees be included in future proxies.

Schapiro announced that the SEC would lift its voluntary stay on amendments to Rule 14a-8, which give shareholders who have held $2,000 or more of a company's stock for at least a year the right to a vote on a resolution recommending that dissident slates be included in the next year's corporate proxy. Companies would not be bound by the resolution if it passes, but a successful initiative would be a strong signal to management that it faces shareholder unhappiness that should be addressed.

Anne Sheehan, director of corporate governance at the California State Teachers' Retirement System (CalSTRS) said she is pleased the SEC is moving forward with some alternative form of proxy access. "We were definitely disappointed with the court's decision. It should be a fundamental right of shareholders to put on a director on the board if management is not acting on our behalf."

The non-binding, two-step-alternative is not as far as CalSTRS would like to go, she said, but is a step toward giving shareholders a greater say in corporate governance.

Even though the rule now in place allows only for non-binding resolutions, Sheehan said companies would be making a big mistake to ignore successful initiatives. "Like with other shareholder resolutions that companies ignored, there can be consequences such as withholding of votes for [management-backed] directors, that sort of thing. If a resolution passes, a company needs to take seriously that they have an issue to discuss with shareholders."

Cornish Hitchcock, an attorney who has advised the Council on Institutional Investors, said the SEC's alternative route is "decidedly second best." But, he said, strong support for similar initiatives at UnitedHealth Group Inc. and Hewlett-Packard Co. show shareholders have an interest in this type of approach.

Schapiro said the procedure is a step forward for investors. "Shareholders and companies have the opportunity to establish proxy access standards on a company-by-company basis," she said in a statement issued Wednesday.

She predicted that a notice formally lifting the stay on the rule will be published September 13.

The SEC in October 2010 stayed the mandatory proxy access rule, issued under authority granted by the Dodd-Frank financial reform law, pending the outcome of a legal challenge filed by the U.S. Chamber of Commerce and the Business Roundtable. The U.S. Court of Appeals for the District of Columbia struck down the rule July 22, agreeing with the business groups that the SEC hadn't adequately assessed the rules' economic burden.

The mandatory access rule was adopted August 2010 by a divided SEC and required a corporation to include in its proxy materials any director nominees put forward by a shareholder or shareholder group that holds 3% or more of the company's stock. The stock must have been held for at least three years. The rule limited the number of nominees that shareholders could put forward to 25% of the board and barred the use of the method for directors intent on gaining control of a company.

The rule drew praise from consumer groups, labor unions and the Council of Institutional Investors, but were immediately attacked by business groups who suggested they would help corporate raiders at the expense of long-term investors.

In conjunction with the mandatory proxy access rule, the commission also amended Rule 14a-8 to create the two-step process for non-binding resolutions. Although the two-step process was not challenged in the business groups' lawsuit, the commission voluntarily stayed the effective date until resolution of the court case.