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Financial regulation bill, letting the activists set the agenda

With the media absorbed with the political disputes over the "bailout" language in the financial regulation bill, S.3217, other objectionable provisions are slipping by with less attention. Take the corporate governance provisions in Title IX, Investor Protections and Improvements to the Regulation of Securities. Labor unions, environmental groups and other activists have long sought more access and authority to force corporate boards into making decisions that serve the activists' agenda over those of the shareholder. (See the AFL-CIO's commentary.) The bill's Subtitle G--"Strengthening Corporate Governance," would effect that fundamental shift.

In the Heritage Foundation's new webmemo, "Senator Dodd's Regulation Plan: 14 Fatal Flaws," the corporate governance language is Flaw 13:

Allows activist groups to use the corporate governance process for issues unrelated to the corporation or its shareholders. Section 972 of the bill authorizes the SEC to require firms to allow shareholders to nominate directors in proxy statement. Such proxy access turns corporate board elections from a process designed to ensure that each board has a good mix of skills and experience into a popularity contest where the long-term interests of the stockholders become secondary to political agendas or corporate raiders. The process can also be used by labor unions, politicians who manage public pension funds, and others to force corporations to respond to pet social or political causes.

Major business associations -- including my employers at the National Association of Manufacturers -- joined with free-market advocates to also register sharp objections to the proxy access language in an April 12 letter, warning it could unleash "an onslaught of activists trying to manipulate the proxy process to force corporate decisions that adversely impact shareholders as a whole in order to further their parochial social or political agenda." More broadly, why are we federalizing corporate law?

The approach, the letter argued, will create:

a "one-size-fits all" approach to the resolution of these issues that will deprive the American economy of diversity and innovation, impose an unwarranted burden on mid-sized and smaller companies, marginalize the state corporate law expertise that has been developed over decades and is better suited to address these issues, and undermine ongoing reforms undertaken by the State of Delaware and the "Model Business Corporation Act," which impacts 30 states.

Separately, free-market and conservative think tanks have signed a letter objecting to the financial regulation bill, including the corporate governance provisions. John Berlau of the Competitive Enterprise Institute reprints the letter at National Review Online's The Corner, "Dodd Bill: Bailouts, Taxes, and Overregulation.

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.