Wednesday, November 4, 2009
Joe Grundfest fo Stanford has a new paper on the SEC's shareholder access proposal, The SEC's Proposed Proxy Access Proposal: Politics, Economics, and the Law.
Abstract: The Securities and Exchange Commission has proposed proxy rules mandating shareholder access under conditions that can be modified by a shareholder majority to make proxy access easier, but not more difficult. From a legal perspective, this Mandatory Minimum Access Regime is so riddled with internal contradictions that it is unlikely to withstand review under the arbitrary and capricious standard of the Administrative Procedures Act A fully-enabling opt-in proxy access rule is, in contrast, entirely consistent with the administrative record developed to date by the agency and is easily implemented without delay.
From a political perspective, and consistent with the agency capture literature, the Proposed Rules are easily explained as an effort to generate megaphone externalities and electoral leverage to benefit constituencies allied with currently dominant political forces, even against the will of the shareholder majority. Viewed from this perspective, the Proposed Rules have nothing to do with shareholder wealth maximization or optimal governance, and reflect a traditional contest for economic rent common to political brawls in Washington D.C.
From an economic perspective, if the Commission nonetheless determines to implement an opt-out approach to proxy access, it will then confront the difficult problem of defining the optimal proxy access default rule that should be subject to a symmetric opt-out by shareholder majority (not the asymmetric opt out imposed by the Mandatory Minimum Access Regime, for which there is no support in the academic literature). The administrative record currently contains no information that would allow the Commission objectively to assess the preferences of the shareholder majority regarding proxy access at any publicly traded corporation. To address this gap in the record, the Commission should, if it determines to follow an opt-out strategy, conduct a properly designed stratified random sample of the shareholder base, and rely on the results of that survey to set appropriate default proxy access rules. The Commission’s powers of introspection are insufficient to divine the value-maximizing will of the different shareholder majorities at each corporation subject to the agency’s authority.