Election Contests in the Company's Proxy: An Idea Whose Time Has Not Come
28 Pages Posted: 11 Mar 2012
Date Written: March 9, 2012
On October 14, 2003, the Securities and Exchange Commission (SEC) issued proposed proxy rules that would permit shareholders to use a company's proxy statement to run a director election contest. The advocates of these proposed rules make familiar arguments. They assert that there is a fundamental problem with American corporate governance, namely that directors and managers are insufficiently responsive to the wishes of shareholders. With this as their premise, they conclude that enhancing the power of shareholders to nominate and elect dissident directors to a company's board will help solve what they characterize as the problem of unresponsive incumbents.
Allowing shareholders to run an election contest through the company's proxy statement, however, would be a serious mistake. Increasing the ease and frequency of election contests would have a negative impact on public companies and their boards, with no clear benefit. A number of issues are immediately apparent: the risk of an influx of special interest directors; the disruption and diversion of resources that would accompany annual election contests; the risk of balkanized and dysfunctional boards; the risk of deterring the most skilled men and women from serving on public company boards. In addition, there is serious doubt as to whether institutional shareholders, public pension funds, and labor unions - the parties most likely to qualify for the right to include director nominees in a company's proxy statement under most proposals - are well-suited to the role of nominating directors. Each has duties to its own constituencies; each has its own agenda; but none has legal duties or obligations to the public company or other shareholders. Particularly in the context of the sweeping corporate governance reforms that have been adopted in the last year, and as we wait to assess the ultimate impact of these reforms, there is simply no compelling case for a new set of regulations designed to facilitate election contests.
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