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"Why Proxy Access (SEC Rule 14a-11) is Harmful to Corporate Governance"

A paper by Bernard Sharfman:

Traditionally, the nomination of directors has been under the control of the board of directors and its nominating committee. However, Section 971 of the Dodd-Frank Wall Street Reform and Consumer Protection Act amended Section 14(a) of the Securities Exchange Act of 1934 to permit the Securities and Exchange Commission (SEC) to adopt rules that will allow shareholders access to a public company's proxy solicitation materials for purposes of nominating their own directors. In response, the SEC promptly issued Rule 14a-11 which provides the current rules for giving certain shareholders proxy access.

A key aspect of the current proxy access rules is that they are, for all intents and purposes, mandatory. There is no opportunity to opt-in or at least opt-out. This one-size-fits-all approach to corporate governance is wealth reducing because it does not allow for private-ordering. In addition, federally mandated proxy access eliminates the benefits of our federalist system from this area of corporate governance.

But there is something even more fundamentally wrong with proxy access. That is, it is a very inefficient means to promote good corporate governance in a public company. As argued here, it is expected that proxy access will lead to increased error in the nomination of directors as decision-making is moved from the board of directors to shareholders who will make their nominations based on significantly less information and a shifting of the potential for certain opportunistic behavior, such as the extracting of private benefits from the corporation, from an independent board and nominating committee to certain shareholders who, unlike directors, are not subject to fiduciary duties. Moreover, even if proxy access can be argued to be good for corporate governance, Rule 14a-11 is not designed to be the optimal default rule.

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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.