Washington Retail Insight

SEC Approves “Proxy Access” in Corporate Board Elections

By J. Craig Shearman
Washington Retail Insight
August 25, 2010

The Securities and Exchange Commission has approved regulations that will make it easier for shareholders to nominate candidates in corporate board elections despite concern from NRF and others that the “proxy access” process could be disruptive.

“As a matter of fairness and accountability, long-term significant shareholders should have a means of nominating candidates to the boards of the companies that they own,” SEC Chairwoman Mary Schapiro said. “Nominating a director is not the same as electing a candidate to the board. I have great faith in the collective wisdom of shareholders to determine which competing candidates will best fulfill the responsibilities of serving as a director.”

Under rules approved 3-2 on Wednesday, shareholders who have owned at least 3 percent of a company’s voting stock for at least three years will be able to demand that their candidates be placed alongside company-backed candidates on proxy ballots printed, mailed and tallied at company expense. Without “proxy access,” candidates face a more expensive and cumbersome process of sending out their own ballots or trying to nominate candidates at the company’s annual meeting.

The 3 percent/three-year threshold was a compromise from the commission’s proposal last year to give proxy access to shareholders who have held as little as 1 percent of a company’s stock for as little as one year.

The three-year period meets NRF’s request made in a letter sent to the commission last week that proxy access only be given to shareholders who have owned company stock for at least two years. But NRF President and CEO Matt Shay said in the letter that the 3 percent level “allows a contest to be launched by too few people.” Instead, NRF sought 5 percent as a “far more appropriate balance.”

“NRF’s members support shareholder democracy,” NRF President and CEO Matthew Shay said. “However, unlike political challenges, proxy contests involve not only policy disputes but actual disengagement of management from the operations that keep the profit-making entity afloat. Accordingly, one should be very certain that access, and the resulting contests, is supported by those who have a substantial stake and interest in the economic well-being of the company.”

Proxy contests are “time consuming and disruptive” and repeated challenges “could cause management to reorient its focus toward satisfying the disruptive shareholder’s immediate goal, regardless of the prospects of success,” Shay said.

Proxy access has been debated by the SEC since at least 2003 but has been strongly opposed by the business community because of the potential disruption to a company’s operations by groups of shareholders seeking a board seat, often to voice displeasure with the company’s actions.

Schapiro revived the issue after taking office in 2009, prompting the commission to issue last year’s 1 percent/one year proposal. During debate of financial services reform legislation, Senator Charles Schumer, D-N.Y., proposed a 3 percent threshold, and Senate Banking Committee Chairman Christopher Dodd, D-Conn., proposed that the threshold be set at 5 percent with a minimum ownership period of two years. The final version of the Dodd-Frank Wall Street Reform Act gave the SEC authority to set regulations for proxy access but left percentages and time periods to the commission.

© 2010 National Retail Federation