A new argument against federal proxy access

Larry Ribstein —  1 November 2010

Dodd-Frank included new federal rules regarding proxy access, which have significant problems. Now a new paper by Becker, Bergstresser and Subramanian provides an additional argument against these rules, Does Shareholder Proxy Access Improve Firm Value? Evidence from the Business Roundtable Challenge.  Here’s the abstract:

We measure the value of shareholder proxy access by using a recent development in the ability of shareholders to nominate candidates for board seats. The SEC’s October 4, 2010 announcement that it would significantly delay implementation of its August 2010 proxy access rule was unexpected and provides a useful natural experiment. Because firms with substantial institutional ownership would have been most affected by the SEC’s now-delayed changes, we use the share and composition of institutional investors to sort firms into those more and less affected by the October 4 news. We find that firms that would have been most affected by proxy access, as measured by institutional ownership, lost value. The value drop was 17 basis points for a 10 percentage point change in large shareholder ownership, and 66 basis points for the same change in activist institution ownership. These results suggest that financial markets placed a positive value on shareholder access, as implemented in the SEC’s August 2010 Rule.

Interesting.  How is this an argument against the federal rules?   Well, I haven’t examined the data, but on the face of it, doesn’t this mean that we don’t need federal law? Can’t we just rely on state law or contracts?  After all, if the market can price proxy access, then investors get what they pay for and firms have incentives to provide it, right?

Larry Ribstein

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Professor of Law, University of Illinois College of Law

One response to A new argument against federal proxy access

  1. 

    Although the proxy access rule is not perfect and probably does not benefit the semi-mythical Individual American Shareholder that Congress seemed to have in mind when it authorized the SEC to promulgate the rule, the argument you raise does not address one of the crucial reasons for instituting the rule: board member entrenchment. You say that “firms” have an incentive to provide for proxy access, which is true if one conceives of the firm as an institutional whole that includes all the stakeholders. However, it is not the “firm” as such that can determine proxy access under existing state law, but rather the board. Classical economic theory would tell us that board members have an incentive to entrench themselves as members because of the utility they derive from the salary, the satisfaction of having the job, the power, and the fringe benefits. This is true despite the economic benefits that would accrue to the firms that allow board members to be replaced more easily. And although an argument might be made that a board member who votes against proxy access is violating a fiduciary duty, the argument is a weak one because it is just as easy to argue that proxy access does not so clearly and indisputably benefit the firm that any board member is obliged to vote in favor of it.

    So yes, firms do have an incentive to provide proxy access. It’s just that most boards won’t allow it.