Why Proxy Access Is Harmful to Corporate Governance

By Sharfman, Bernard S. | Journal of Corporation Law, Winter 2012 | Go to article overview

Why Proxy Access Is Harmful to Corporate Governance

Sharfman, Bernard S., Journal of Corporation Law


Traditionally, the nomination of directors has been under the control of the board of directors and its nominating committee.1 In this role, the board is to evaluate the characteristics of the existing management team and incumbent board members and the challenges and opportunities facing the corporation and then take these factors into consideration when nominating director candidates.2 However, this traditional function of the board is now being challenged by new federal legislation and recently promulgated Securities and Exchange Commission (SEC) rules that support providing co-responsibility for this function with shareholders.

Section 971 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)3 amended Section 14(a) of the Securities Exchange Act of 1934 (Exchange Act) to permit the SEC to adopt rules that will allow shareholders access to a public company's4 proxy solicitation materials for purposes of nominating their own directors. That is, certain shareholders would gain the ability to place their director nominees alongside the board's slate of director nominees in the company's proxy card and proxy statement (proxy access). In response, the SEC promptly issued Rule 14a-11.5

A key aspect of Rule 14a-11 was that it required proxy access at all publicly traded companies. Public companies were not allowed to opt-out of the proxy access rules.6 This one-size-fits-all approach to corporate governance is much reviled among corporate law scholars and practitioners who believe that a very important reason why corporate law is wealth enhancing is because it allows for private-ordering.7 That is, company officials and investors are in a much better position to determine the optimal corporate governance arrangements of their company than public officials.8 In addition, federally mandated proxy access eliminates the benefits of our federalist system from this area of corporate governance.9 As Justice Brandeis so eloquently stated many years ago, "a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country."10 The proxy process will be less effective without state experimentation because, even if proxy access can be argued to be good for corporate governance, there is good reason to believe that Rule 14a-11 was not the optimal default rule.11

The imposition of a mandatory regime of inefficient corporate governance rules as provided for in Rule 14a-11, no matter what the will of the majority of shareholders or the individual needs of a particular firm, is wealth reducing.12 This suggests that a better approach to proxy access would have been to provide public companies the option to opt-in13 or at least opt-out of Rule 14a-11. Nevertheless, the SEC was quick to embrace mandatory proxy access.

Why the SEC would so quickly embrace rules that have a wealth reducing effect is a reflection of the growing political power of those that support mandatory proxy access. This is evidenced by the inclusion of Section 971 in the Dodd-Frank Act, even though there are no facts to support the argument that proxy access will enhance financial stability,14 and the changing make-up of SEC Commissioners from a Republican to Democratic majority, the political party which is strongly supported by the most vigorous advocates of proxy access, unions, and public pension funds.15

Enhancing the political support for proxy access has been the ongoing and growing shareholder empowerment16 movement.17 This movement has been fueled by the growing dominance of institutional investors in the investment of publicly held stock, helping to reduce investors collective action costs,18 which in turn has been fueled by a reduction in the collective action costs of institutional investors through the use of shareholder advisory services such as Institutional Shareholder Services;19 the increasing ability of activist hedge funds to raise large pools of funds so as to seek significant positions in public companies;20 perhaps, most importantly, the SEC's ideological support of shareholder interests,21 which has led to the liberalization of communications between shareholders with respect to proxy voting,22 elimination of discretionary broker voting for the election of directors,23 and required disclosure of proxy voting by investment companies;24 and the newfound ability to use the populist argument that shareholders must take a more active role to constrain reckless risk-taking by corporate managers in order to prevent another financial crisis. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Cite this article

Cited article

Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Why Proxy Access Is Harmful to Corporate Governance


Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    New feature

    It is estimated that 1 in 10 people have dyslexia, and in an effort to make Questia easier to use for those people, we have added a new choice of font to the Reader. That font is called OpenDyslexic, and has been designed to help with some of the symptoms of dyslexia. For more information on this font, please visit OpenDyslexic.org.

    To use OpenDyslexic, choose it from the Typeface list in Font settings.

    OK, got it!

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search


    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.