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Proxy access is a killer idea? For whom?

Lest readers fall asleep about the idea of proxy access, take note of the Business Roundtable reaction.

Business Roundtable voices discontent:

Ivan G. Seidenberg, chief executive of Verizon Communications, said that Democrats in Washington are pursuing tax increases, policy changes and regulatory actions that together threaten to dampen economic growth…

The final straw, said Roundtable president John Castellani, was the introduction of two pieces of legislation, now pending in Congress, that the group views as particularly bad for business. One, a provision of the administration’s financial regulation overhaul, would make it easier for shareholders to nominate corporate board members. The other would raise taxes on multinational corporations. The rhetoric accompanying the tax proposals has been particularly harsh, Castellani said, with Democrats vowing to campaign in this fall’s midterm elections on a platform of punishing companies that move jobs overseas.

The Washington Post reports the importance attached to proxy access:

A rush of chief executives from a wide swath of industries has been coming through Washington over the past three weeks, talking to lawmakers about a long-debated issue called “proxy access,” which would make it easier for shareholders at all publicly traded companies — not just banks — to nominate board directors. Opponents say the rule has nothing to do with overhauling Wall Street and doesn’t belong in the legislation.

“This is our highest priority,” said John Castellani, president of the Business Roundtable, which represents 170 chief executives. “Literally all of our members have called about this.”

Advocates for shareholders’ rights, including unions and institutional investors, say the crisis on Wall Street had everything to do with corporate boards failing to do their jobs.

With proxy access, shareholders would be able to send a strong message to management if they weren’t happy with a company’s strategy, for instance, in managing risk or charting growth. On the other side, public companies fear that proxy access will mainly invite activist investors and hedge funds to infiltrate boards and topple existing management — whether out of displeasure with how a company is run or to pave the way for a hostile takeover.

The end result, corporate executives warn, is that board directors will feel constant pressure to juice up their company’s stock price and put short-term considerations ahead of the firm’s long-term health…

While of course not true for all businesses, I thought that 2005 to 2007 were especially good years for stock price pushing and short-term health advocates without the help of proxy access, for instance. And I haven’t even emphasized MSN taxes! Which I will later.

Update: Hat tip Naked Capitalism for this link to Don’t gut proxy access by Lucien Bebechuk from Harvard University.

The primary purpose of a proxy-access reform is to facilitate increased involvement by long-term institutional investors that have “skin in the game” but not a big block of shares. Consider, for example, the asset manager TIAA-CREF, a long-term investor holding on the order of half a percent of the shares of many large public companies. Because such an investor would be able to capture only a very small fraction of the benefits of improved governance, it cannot be expected to undertake a costly proxy solicitation even when it believes that replacing directors would significantly enhance firm value. But if this investor could place a director on the ballot, it might do so when it views governance as especially poor. And the ability of such institutional investors to do so might make boards more attentive to shareholder interests in the first place.

Under the S.E.C.’s proposed rule, the ownership threshold would be 1 percent for large companies. While such a threshold would serve as a meaningful screen, limiting the use of proxy access to special cases, involvement by such institutional investors would remain viable. Moreover, without the proposed legislative limit on its authority, the S.E.C. would be able to lower its initial threshold if it proved too burdensome.

With a hard-wired legislative threshold of 5 percent ownership, however, the proxy-access provisions would be largely practically irrelevant for such long-term institutional investors. Even if all the 10 largest public pension funds hypothetically banded together – a concerted action that would involve overcoming significant coordination costs and collective action barriers – they would commonly fail to reach the 5 percent threshold. For example, data put together by Calpers, the giant California state pension fund, indicates that the 10 largest pension funds hold less than 2.5 percent at Bank of America, Microsoft, I.B.M. and Exxon Mobil; even if all these funds joined forces, they would still have less than half of the amount needed to reach the 5 percent threshold.

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Proxy Voting 101

Rdan here…The following post is the first of a possible four concerning shareholders, that magic group of owners of publicly traded companies which is invoked as beneficiaries of actions and policies by company officers and Boards. While many readers are well versed in shareholder doings, we also have readers less versed in how this is done, hence Proxy Voting 101 at my request to begin. But if you read news media, all is done for the sake of ‘shareholders’. Lets begin the discussion.

A guest post from Doug Gates, vice president and co-founder of Moxy Vote (
Proxy Voting 101

When you own something you generally expect to be able to control it. This is easy if you’re the only owner – “it’s my car, so I’ll decide when to change the oil.” It gets more complicated when there are multiple owners – “it’s our house, so ‘Honey? Is it time to fix our deck?’” This can create long discussions about budgets, priorities, plans and other issues. Now imagine there are millions of owners. You need to keep these owners informed about what they own and you need their input on big decisions. Organize this mob into a productive committee and you’ll be ready for work in corporate governance.

American companies ostensibly serve at the pleasure of their shareholders, so they periodically look to us for a nudge in the right direction. Our financial and regulatory system has developed the proxy voting process to deliver these nudges and give the shareholders a say.

Here’s how it works in theory: companies assemble proxy ballots and distribute them to shareholders. Shareholders cast their votes, one per share, and the votes are tallied. The result is announced and the business moves on.

Of course, this well-intentioned process is never this easy. Let’s look at this piece by piece:

1. Companies assemble proxy ballots. If you’ve seen a proxy ballot before, you know they don’t usually contain gripping, exciting information. Rather it has information on reelecting a director, appointing an auditor, designating a compensation committee, etc. In their proxy statements, companies recommend how you should vote on each of these.

If shareholders are particularly organized, they can submit their own ballot proposals on specific issues they are passionate about. In general, shareholder proposals are due six months before the vote, they can’t deal with “ordinary business operations,” and are toothless. That’s right — they’re non-binding, although they do put public pressure on management. Shareholder proposals have been used to make statements on issues such as executive compensation, labor relations and global warming. Social activists like PETA and the Teamsters use shareholder resolutions, and they have also been used by activist investors like Carl Icahn and Eric Jackson. Most shareholder resolutions are rejected by voters.

2. Ballots are distributed to shareholders. This is not nearly as easy as it sounds. For various reasons, many companies don’t even know the identities of most of their shareholders. To distribute the proxy materials to unknown shareholders, companies hire a proxy distribution agent, who has relationships with all the brokers, funds and other intermediaries necessary to unravel the ownership chain. Broadridge Financial, a $2.5 billion company, has a near lock on this market. The company sends proxy ballots to the distribution agent, who figures everything out and distributes them to shareholders. Companies can contact their known shareholders by getting their names from the transfer agent they’ve hired to maintain shareholder records.

3. Shareholders cast their ballots – at least in theory. Most shares aren’t bought and sold by individual investors like you and me. They’re controlled by large institutional investors, such as pension funds and mutual funds. With thousands of proxy ballots to vote every year, most of these institutional investors hire a proxy advisory firm to recommend how to vote each ballot. MSCI and The Corporate Library are among a handful of companies that compete in this space. The large institutional shareholders vote because they have the obligation and the resources to figure out the best way to vote.

Small individual shareholders, like you and me, often choose to not vote. If you’ve ever received the thick packet of ballot legalese in the mail, you know why. It takes time and effort to vote when it appears to have little benefit. You can vote on a paper ballot, just like grandpa did, or you can vote via telephone or the Web.

As a shareholder, you’re eligible to attend the company’s annual meeting, which can be a fascinating mix of administrative trivia and theatrics. Just weeks ago, Walmart entertained their shareholders with pep rallies, speeches, the comedy of Jamie Foxx and musical performances by the Barenaked Ladies, REO Speedwagon and Tim McGraw. 16,000 people attended the closed-to-the-public festivities at the University of Arkansas’ Bud Walton Arena.

4. Results. A few weeks after the voting deadline, the company announces the results of the vote, and the business moves forward. Everything starts over in nine months as the next set of proxy ballots are distributed.

As you can see the proxy voting process is simple in theory, but a closer look reveals the complexities of the system and the difficulties individual shareholders face when desiring to vote and influence company management. In our next post, we will discuss what’s wrong with the proxy process and how individuals can increase their participation and influence.

Shameless plug: Doug Gates works at Moxy Vote, which empowers individual shareholders to form sizable voting blocs and get attention in the boardroom. Hear a radio interview here.
Doug has 13 years of experience building and marketing websites at CNET, mySimon, TheFind and Musicmatch, with previous experience as a litigation consultant, and is an MBA from Stanford.

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