Private Ordering and the Proxy Access Debate

Abstract

This Article examines two “meta” issues raised by opponents of the SEC’s proposal to provide shareholders with rights to place director candidates on the company’s proxy materials. First, opponents argue that, even assuming proxy access is desirable in many circumstances, the existing no-access default should be retained and the adoption of proxy access arrangements should be left to opting out of this default on a company-by-company basis. This Article, however, identifies strong reasons against retaining no-access as the default. There is substantial empirical evidence indicating that director insulation from removal is associated with lower firm value and worse performance. Furthermore, when opting out from a default arrangement serves shareholder interests, a switch is more likely to occur when it is favored by the board than when disfavored by the board. We analyze the impediments to shareholders’ obtaining opt-outs that they favor but the board does not, and we present evidence indicating that such impediments are substantial. The asymmetry in the reversibility of defaults highlighted in this Article should play an important role in default selection.

Second, opponents of the SEC’s proposed reforms argue that, if the SEC adopts a proxy access regime, shareholders should be free to opt out of this regime. We point out the tensions between advocating such opting out and the past positions of many of the opponents, as well as tensions between opting out and the general approach of the proxy rules. Nonetheless, we support allowing shareholders to opt out of a federal proxy access regime, provided that the opt-out process includes necessary safeguards. Opting out should require majority approval by shareholders in a vote where the benefits to shareholders of proxy access are adequately disclosed, and shareholders should be able to reverse past opt-out decisions by a majority vote at any time.

The implications of our analysis extend beyond proxy access to the choice of default rules for corporate elections, and to the ways in which shareholders should be able to opt out of election defaults. In particular, the current plurality voting default should be replaced with a majority voting default, and existing impediments to the ability of shareholders to opt out of arrangements that make it difficult to replace directors should be re-examined.

Keywords: Proxy access, Securities and Exchange Commission, shareholder voting, corporate elections, corporate governance, directors, default rules, private ordering, boards

JEL Classification: G3, G38, K2, K22