{"id":9235,"date":"2010-03-05T13:34:09","date_gmt":"2010-03-05T18:34:09","guid":{"rendered":"http:\/\/law.marquette.edu\/facultyblog\/?p=9235"},"modified":"2010-03-17T14:51:50","modified_gmt":"2010-03-17T19:51:50","slug":"proxy-amendments-and-short-term-shareholders","status":"publish","type":"post","link":"https:\/\/law.marquette.edu\/facultyblog\/2010\/03\/proxy-amendments-and-short-term-shareholders\/","title":{"rendered":"Proxy Amendments and Short-Term Shareholders"},"content":{"rendered":"

\"ConferenceFirst, thank you for the invitation to be the March Student Blogger.\u00a0 I have significant experience in blogs.\u00a0 But perhaps unfortunately for this blog, that experience is restricted to Nebraska football and Lost<\/em> blogs.\u00a0 And I don\u2019t think this is the proper forum for discussions of the Huskers\u2019 2011 recruiting class or how the Valenzetti Equation may answer all your questions regarding Lost<\/em>.\u00a0 However, I am open to requests during my March tenure.<\/p>\n

Moving on.<\/p>\n

Several blogs on this site have addressed election issues and reform in the judicial and political spheres.\u00a0\u00a0 Yet, despite imminent changes with regard to the election of corporate directors, any discussion of corporate election reform has been noticeably absent.\u00a0 I do not doubt that the rules regarding the election of directors will change significantly this year.<\/p>\n

Specifically, on June 10, 2009, the SEC published proposed amendments<\/a> to the federal proxy rules that would facilitate shareholders\u2019 ability to nominate directors to company boards of directors. <\/sup> Under the current director election rules, shareholders seeking to nominate a competing slate of director candidates have to bear all costs of a proxy campaign.\u00a0 Yet, all costs for the campaigns of the incumbent board\u2019s nominees are paid for out of corporate funds.\u00a0 That advantage to the board\u2019s nominees coupled with the significant costs in mounting a proxy contest serve as effective barriers to dissident shareholders seeking to initiate an election contest.<\/p>\n

To be sure, shareholders vote for a company\u2019s directors.\u00a0 And, like any election, the shareholder election is intended to ensure that directors are accountable to shareholders\u2019 interest. \u00a0But corporate scholars disagree over whether the election process in its current form has that effect.\u00a0 Given the current director election rules, the shareholder vote essentially serves as rubber-stamp for the board\u2019s nominees for directors.\u00a0 In effect, the incumbent board determines who is elected to the board, not the shareholders.\u00a0 (I will note that of the proxy contests that actually occur, they are almost exclusively initiated by hedge funds.\u00a0 But for reasons beyond the scope of this blog, those are not the investors that directors should be accountable to.)<\/p>\n

The proposed SEC amendments would put shareholder nominees on equal footing as the director nominees.\u00a0 The amendments would allow nominees of dissident shareholders to avoid the expenses of a proxy campaign.\u00a0 Instead, if shareholders met certain requirements, they could submit their nomination to the company and the company would have to include it in its own proxy statement.<\/p>\n

Not surprisingly, the proposed amendments are controversial.\u00a0 The SEC once postponed its final ruling and then recently re-opened the time for comments.\u00a0 I believe the SEC will amend the proxy rules to facilitate shareholder director nomination, but it is still unclear what form those amendments will take.<\/p>\n

I am generally not in favor of empowering shareholders through measures that give shareholders direct influence over specific business decisions (e.g., \u201csay on pay\u201d provisions), but I do believe amending the proxy rules will benefit corporations by making the election process more meaningful.\u00a0 As one commentator put it, \u201cIf shareholders are able to elect directors and hold them properly accountable for their performance, then they should be more willing to let them get on with the job.\u201d<\/p>\n

My main concern with the proposed amendments is regarding the requirements a shareholder must meet to have its nominee put on the company proxy card.\u00a0 In addition to minimum ownership requirements, the SEC proposes a one-year holding requirement of shares prior to a shareholder exercising its right to nominate a director.\u00a0 The purpose of that latter requirement is to restrict shareholders seeking proxy access to those with long-term interests; thus eliminating shareholders that may use a proxy contest for short-term gain.<\/p>\n

I believe the one-year holding requirement falls short of its intended purpose.\u00a0 Rather, despite the holding requirement, the proposed proxy amendments present a powerful incentive to use them solely for short-term gain\u2014specifically, taking advantage of the short-term \u201cspike\u201d in share value that typically follows a proxy contest.\u00a0 A recent study<\/a> of hybrid boards\u2014i.e., boards with members elected from proxy contests\u2014indicate that share value, almost invariably, \u201cspikes\u201d in those companies for one year following the proxy contest (because investors perceive the proxy contest as an indication that a company was underperforming and undervalued), \u00a0and company shares significantly outperform the market for that one year.\u00a0 However, the shares generally underperform the market following that year.\u00a0 Accordingly, I believe the proposed amendments will create incentives for shareholders to achieve a short-term stock value \u201cspike\u201d typically associated with a proxy contest, regardless of whether a shareholder-nominated director may be sub-optimal from a long-term company value point of view.\u00a0 Once that short-term value \u201cspike\u201d is achieved, the shareholder can then simply sell its shares to capitalize on their short-term increased value.<\/p>\n

This perverse short-term incentive created despite a holding requirement is not unique to the proposed proxy amendment situation. Corporate legal scholar William Bratton recognized this perverse short-term incentive with regard to stock options in executive compensation packages. <\/sup> He noted that even stock options that have long vesting periods (such as the prevailing ten year duration) but are set to vest in the near future lure executives to manage for the short-term in order to quickly increase stock value as the vesting period nears.\u00a0 If executives will soon acquire stock through option exercise, they have an incentive to choose a \u201cglamour investment,\u201d although \u201c[f]rom a long-term, fundamental value point of view, the glamour investment is sub-optimal.\u201d<\/p>\n

I don\u2019t see the short-term incentive resulting from proposed SEC amendments as being much different than the situation Bratton describes.\u00a0\u00a0 As soon the holding period vests for a shareholder, a shareholder has a powerful incentive to nominate a director in order to capitalize on a short-term share value \u201cspike\u201d following the proxy contest.\u00a0 But whether that nomination is good for the company in the long-term is questionable.\u00a0\u00a0 Ultimately, the amendments may actually encourage shareholders to use a proxy contest for short-term gain rather than restrict shareholders seeking proxy access to those with long-term interests.<\/p>\n","protected":false},"excerpt":{"rendered":"

First, thank you for the invitation to be the March Student Blogger.\u00a0 I have significant experience in blogs.\u00a0 But perhaps unfortunately for this blog, that experience is restricted to Nebraska football and Lost blogs.\u00a0 And I don\u2019t think this is the proper forum for discussions of the Huskers\u2019 2011 recruiting class or how the Valenzetti […]<\/p>\n","protected":false},"author":78,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"ocean_post_layout":"","ocean_both_sidebars_style":"","ocean_both_sidebars_content_width":0,"ocean_both_sidebars_sidebars_width":0,"ocean_sidebar":"","ocean_second_sidebar":"","ocean_disable_margins":"enable","ocean_add_body_class":"","ocean_shortcode_before_top_bar":"","ocean_shortcode_after_top_bar":"","ocean_shortcode_before_header":"","ocean_shortcode_after_header":"","ocean_has_shortcode":"","ocean_shortcode_after_title":"","ocean_shortcode_before_footer_widgets":"","ocean_shortcode_after_footer_widgets":"","ocean_shortcode_before_footer_bottom":"","ocean_shortcode_after_footer_bottom":"","ocean_display_top_bar":"default","ocean_display_header":"default","ocean_header_style":"","ocean_center_header_left_menu":"","ocean_custom_header_template":"","ocean_custom_logo":0,"ocean_custom_retina_logo":0,"ocean_custom_logo_max_width":0,"ocean_custom_logo_tablet_max_width":0,"ocean_custom_logo_mobile_max_width":0,"ocean_custom_logo_max_height":0,"ocean_custom_logo_tablet_max_height":0,"ocean_custom_logo_mobile_max_height":0,"ocean_header_custom_menu":"","ocean_menu_typo_font_family":"","ocean_menu_typo_font_subset":"","ocean_menu_typo_font_size":0,"ocean_menu_typo_font_size_tablet":0,"ocean_menu_typo_font_size_mobile":0,"ocean_menu_typo_font_size_unit":"px","ocean_menu_typo_font_weight":"","ocean_menu_typo_font_weight_tablet":"","ocean_menu_typo_font_weight_mobile":"","ocean_menu_typo_transform":"","ocean_menu_typo_transform_tablet":"","ocean_menu_typo_transform_mobile":"","ocean_menu_typo_line_height":0,"ocean_menu_typo_line_height_tablet":0,"ocean_menu_typo_line_height_mobile":0,"ocean_menu_typo_line_height_unit":"","ocean_menu_typo_spacing":0,"ocean_menu_typo_spacing_tablet":0,"ocean_menu_typo_spacing_mobile":0,"ocean_menu_typo_spacing_unit":"","ocean_menu_link_color":"","ocean_menu_link_color_hover":"","ocean_menu_link_color_active":"","ocean_menu_link_background":"","ocean_menu_link_hover_background":"","ocean_menu_link_active_background":"","ocean_menu_social_links_bg":"","ocean_menu_social_hover_links_bg":"","ocean_menu_social_links_color":"","ocean_menu_social_hover_links_color":"","ocean_disable_title":"default","ocean_disable_heading":"default","ocean_post_title":"","ocean_post_subheading":"","ocean_post_title_style":"","ocean_post_title_background_color":"","ocean_post_title_background":0,"ocean_post_title_bg_image_position":"","ocean_post_title_bg_image_attachment":"","ocean_post_title_bg_image_repeat":"","ocean_post_title_bg_image_size":"","ocean_post_title_height":0,"ocean_post_title_bg_overlay":0.5,"ocean_post_title_bg_overlay_color":"","ocean_disable_breadcrumbs":"default","ocean_breadcrumbs_color":"","ocean_breadcrumbs_separator_color":"","ocean_breadcrumbs_links_color":"","ocean_breadcrumbs_links_hover_color":"","ocean_display_footer_widgets":"default","ocean_display_footer_bottom":"default","ocean_custom_footer_template":"","ocean_post_oembed":"","ocean_post_self_hosted_media":"","ocean_post_video_embed":"","ocean_link_format":"","ocean_link_format_target":"self","ocean_quote_format":"","ocean_quote_format_link":"post","ocean_gallery_link_images":"on","ocean_gallery_id":[],"footnotes":""},"categories":[41],"tags":[],"class_list":["post-9235","post","type-post","status-publish","format-standard","hentry","category-business-transactional-law-and-practice","entry"],"_links":{"self":[{"href":"https:\/\/law.marquette.edu\/facultyblog\/wp-json\/wp\/v2\/posts\/9235","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/law.marquette.edu\/facultyblog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/law.marquette.edu\/facultyblog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/law.marquette.edu\/facultyblog\/wp-json\/wp\/v2\/users\/78"}],"replies":[{"embeddable":true,"href":"https:\/\/law.marquette.edu\/facultyblog\/wp-json\/wp\/v2\/comments?post=9235"}],"version-history":[{"count":0,"href":"https:\/\/law.marquette.edu\/facultyblog\/wp-json\/wp\/v2\/posts\/9235\/revisions"}],"wp:attachment":[{"href":"https:\/\/law.marquette.edu\/facultyblog\/wp-json\/wp\/v2\/media?parent=9235"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/law.marquette.edu\/facultyblog\/wp-json\/wp\/v2\/categories?post=9235"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/law.marquette.edu\/facultyblog\/wp-json\/wp\/v2\/tags?post=9235"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}