The SEC’s Meaningless Plan To Offer Shareholders More Power

The way that board members get elected at public companies is simple. The nominating committee of the board, often friends of the CEO, put the name of current directors or new ones they might choose, onto the proxy. Most investors, even large institutions, check the boxes for those who have been nominated. Generally, the nominees get 90% or the votes, or better. Even when a director does much worse in the balloting, like Michael Dell did recently, they are still almost always elected.

The SEC has proposed that shareholders be able to nominate potential board members of their own. All board nominees, included those not rubber stamped by the board, will appear on the proxy ballot . The trick to the program is that an investor must hold 3% of a corporation’s share and must have held those shares for three years to nominate an alternative director.

The decision may advance the cause of some large institutional shareholders. However, most pension funds, mutual funds, and unions who disagree with company management and the direction of a firm’s share price simply sell their stock rather than risk the chance that a proxy fight will make a difference in a corporation’s direction. Boards will still, in almost every case, dominate the nomination and election process. A large investor may get one director onto a board. That member’s efforts will be stifled by all of the other board members as a matter of simple math.

As usual, the small shareholders of public companies will get nothing from the SEC plan. Companies can allow their CEOs to ride corporate planes and get millions of dollars in compensation–even a a firm with an underperforming stock. A company can offer rosy forecasts. SEC regulations say that the companies can protect themselves as long as they say that management could be wrong about the future. When management is wrong, shareholders are left holding less valuable shares.

The principle behind the SEC’s decision is simple even if it is not stated. Small investors can sell their stock in a company when the disagree with the board, even if the board has not done them any favors.

It used to be fairly normal for critics of big companies to query “Where are the shareholder’s yachts?” The question now applies to corporate airplanes.

Douglas A. McIntyre