2007 Lane Reports

Policy Change Would Gut the Rights of Shareholders

Monday, October 1, 2007
by Marc J. Lane

For no good reason, the Securities and Exchange Commission is mulling over a misguided change in regulatory policy that would hobble shareholders' right to file non-binding proposals on corporate governance, social and environmental issues with the companies they own.

Commissioner Paul Atkins is leading the charge against shareholders' advisory resolutions which, in his hyperbolic words, perpetuate "the tyranny of the minority" who leverage their "nominal economic interest to hijack the agenda of all investors." Mr. Atkins wrongheadly insists that non-binding proxies burden corporate management with unnecessary costs and distractions and tie up the Commission's staff with requests for no-action letters from companies fending off shareholder resolutions.

The SEC is considering new rules including an "opt-out" option, which would allow companies simply to disregard advisory resolutions; the possibility of replacing non-binding resolutions with on-line "chat rooms" or electronic petitions; and a proposed requirement that resolutions submitted in an earlier year must have earned 10 percent shareholder support to be eligible for resubmission, up from 3 percent under the current rule. The thresholds for proposals which have been submitted two or three times before would also increase dramatically.

The opt-out option would excuse unresponsive companies that defy shareholders who demand good governance practices. And it would treat shareholders of different companies unequally, creating a chaotic crazy quilt of standards across companies.

Substituting on-line chats or petitions for advisory proposals which can lead to constructive engagement with management would also be a blunder with serious consequences. Only with a robust process that vets and productively addresses shareholders' legitimate concerns can we insure the heightened accountability our capital markets expect and our global competitiveness requires.
Arbitrarily increasing the threshold on resubmitting resolutions would ignore the reality that, with shareholder education, support for worthy positions can grow over time. The proposal would effectively kill good resolutions that should, and otherwise eventually would, succeed.

Investor access to proxies has paid dividends. Last year in Chicago, for example, Boeing Company's board approved a management-proposed bylaw amendment to permit shareholder approval with a simple majority, rather than a supermajority as previously required, only after shareholders proposed the change and won the support of most shareholders four years in a row. And McDonald's Corporation agreed to disclose its "soft money" political contributions only after a shareholder proposal forced management's hand.

Shareholder engagement works. It also drives shareholder value. The empirical evidence is convincing: the common stock of companies that earn the highest marks for corporate governance, social justice and environmental concerns outperforms their peers.

If shareholders are discouraged or prevented from relying on advisory resolutions to influence corporate behavior, they'll be forced to pursue binding bylaw amendments, SEC enforcement or legislative action, at greater costs and with greater effort. Let's vigorously resist the Commission's unprecedented initiative to roll back investor rights.

This month's Lane Report is adapted from a guest editorial published in Crain's Chicago Business on September 24, 2007.

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The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright © 2007 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.

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