October 31, 2010
Kahan & Rock on Proxy Access
The Insignificance of Proxy Access, by Marcel Kahan, New York University - School of Law, and Edward B. Rock, University of Pennsylvania Law School, was recently posted on SSRN. Here is the abstract:
The SEC recently adopted rules on proxy access. These rules grant shareholders who hold at least 3% of the company stock for three years the right to nominate directors and to have their nominees included in the company’s proxy statement and the ballots distributed by the company. Because proxy access is viewed as dramatically lowering the costs of an election contest, both proponents and opponents of these rules predict that they will have a significant impact. Contrary to this conventional wisdom, we argue that proxy access will lead to few shareholder nominations, that most of these nominees will be defeated, and that the occasional nominee who does get elected will have little impact.
Based on past involvement in shareholder activism, we believe that neither mutual funds nor private pension funds will make significant use of proxy access. Certain large public pension funds have shown a modest interest in activism and may make some nominations. The entities with the greatest interests in activism - hedge funds and union-affiliated funds - will generally not satisfy the ownership and holding period requirements.
When compared to traditional proxy contests and to withhold campaigns, proxy access involves significant disadvantages, while promising only modest advantages. The cost savings of proxy access compared to traditional contests are overstated because most proxy contests expenses are discretionary campaign expenses or relate to other expense items that are unaffected by the proxy access rule. By contrast, the limitations that come with proxy access are significant: the number of nominees a shareholder can propose is limited; the level of shareholder support required to gain a seat, as a practical matter, is increased; the company retains control over the design of the proxy cards; and the company retains exclusive access to preliminary voting information.
When compared to withhold-vote campaigns, the more certain effect on board makeup and governance from a successful proxy access campaign must be weighed against countervailing factors that reduce the likelihood of success: the higher level of shareholder support required for success; the greater challenge of positive versus negative campaigning; and the vulnerability of the dissident shareholders and their nominees to attacks by the company for lack of qualification or conflicts of interest. Such attacks will resonate especially for nominees by unions and public pension funds. Their inability or unwillingness to defend against such attacks without incurring significant expense may make it difficult to find qualified nominees.
Overall, we believe that proxy access will have some undesirable effects - it will result in some increase in company expenses and may rarely increase the leverage of shareholders whose interest conflict with those of shareholders at large - and some desirable ones - it may occasionally lead to the election of nominees at recalcitrant boards, where such nominees may have a modest impact on governance and a marginal impact on company value. None of these effects is likely to be very material, and the net effect is likely to be close to zero.
Bainbridge on Corporate Governance and Competition
Corporate Governance and U.S. Capital Market Competitiveness, by Stephen M. Bainbridge, University of California, Los Angeles (UCLA) - School of Law, was recently posted on SSRN. Here is the abstract:
This essay was prepared for a forthcoming book on the impact of law on the U.S. economy. It focuses on the impact the corporate governance regulation has had on the global competitive position of U.S. capital markets.
During the first half of the last decade, evidence accumulated that the U.S. capital markets were becoming less competitive relative to their major competitors. The evidence reviewed herein confirms that it was not corporate governance as such that was the problem, but rather corporate governance regulation. In particular, attention focused on such issues as the massive growth in corporate and securities litigation risk and the increasing complexity and cost of the U.S. regulatory scheme.
Tentative efforts towards deregulation largely fell by the wayside in the wake of the financial crisis of 2007-2008. Instead, massive new regulations came into being, especially in the Dodd Frank Act. The competitive position of U.S. capital markets, however, continues to decline.
This essay argues that litigation and regulatory reform remain essential if U.S. capital markets are to retain their leadership position. Unfortunately, the article concludes that federal corporate governance regulation follows a ratchet effect, in which the regulatory scheme becomes more complex with each financial crisis. If so, significant reform may be difficult to achieve
Romano on Financial Regulation Harmonization
Against Financial Regulation Harmonization: A Comment, by Roberta Romano, Yale Law School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI), was recently posted on SSRN. Here is the abstract:
This comment is on a paper by Christian Kirchner and Wulf Kaal, which proposes a variety of post-financial crisis regulatory reforms under a common theme of minimizing “regulatory arbitrage.” The comment focuses on one of their proposals, hedge fund regulation, and then picks up on the theme of regulatory arbitrage to discuss a broader reform issue regarding financial regulatory architecture. I contend that the move to regulate hedge funds is misguided because hedge funds were not a cause of the recent crisis, nor are they likely to cause a future one. Rather, the regulatory response to hedge funds can best be understood in terms of the historical pattern of hostility to short sellers. I further contend that the post-crisis emphasis on regulatory consolidation and harmonization, which is a common legislative response following a crisis, is as misguided as the regulatory focus on hedge funds. In particular, in a regime of global harmonization, regulatory error can result in heightened systemic risk, as regulatory incentives lead financial institutions worldwide to adopt similar business strategies. When such strategies fail, they do so on a global basis, and can thereby precipitate a global financial crisis. Accordingly, regulatory arbitrage, a byproduct of regulatory diversity, provides a valuable, and little appreciated, hedge against systemic failure.