WASHINGTON, D.C. — In 2003, the Securities and Exchange Commission proposed a controversial rule — known as a shareholder access proposal — intended to make it easier for shareholders to nominate and elect members of corporate boards.
While well-intended, the proposed rule would have dramatically restricted a company’s ability to govern itself effectively and efficiently, and opposition spread like wildfire throughout corporate America. As a result, the SEC wisely never moved it beyond the proposal stage.
Unfortunately, a September decision by the Second U.S. Circuit Court of Appeals in American Federation of State County and Municipal Employees (AFSCME) v AIG has put the issue back on the table and there are signs that the ruling may push the SEC — its new leadership notwithstanding — to permit something like the original shareholder access rule to come into effect. If so, this would be an overly broad reading of the court’s decision and a grave policy mistake.
The AFSCME/AIG case revolved around the obscure question of when a shareholder proposal “relates to an election.” The SEC’s current proxy rules permit shareholders to offer proposals of various kinds, and companies must include these proposals in their proxy materials even if they disagree with them. But this is not true when it comes to contests for board seats.
In these cases, the SEC has taken the position that the contesting parties — the company and the challengers — must solicit proxies separately in support of their candidates. Pursuing this approach since 1976, the SEC has permitted companies to exclude from their proxy material any shareholder proposal that “relates to an election.”
The AFSCME case began with a request by the giant public employees union to include in AIG’s proxy materials a proposal to amend the company’s by-laws so qualified shareholders could nominate a director for the company’s board and have the nomination included in the company’s proxy statement.
This is clearly a proxy access proposal masquerading as a by-law amendment. If adopted, it would require a company to include on the same ballot as its own management nominees the nominees of shareholders that meet the by-law’s qualifications.
Thus, an immense issue of corporate governance policy has arisen in a case where the narrow question before the court was merely whether the AFSCME proposal “relates to an election.”
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