Proxy Access: Shareholder Democracy, Maybe

Great column by Floyd Norris today on the potential dark side of proxy access. Although I've made fun of the corporate establishment’s apocalyptic view of this concept, they're right that it carries some risks.

The combo of allowing proxy access and disallowing broker voting in director elections will definitely bring more democracy to the world of public companies. But will it be the kind of democracy we need?

It’s not easy, after all, to devise an electoral system that works. American democracy was designed by those wise Founding Father guys, and yet we just came damn close to putting a winking Alaskan on the threshold of the Oval Office, where you betcha she'd have been hanging out and coaxing President Melanoma McCain to come out and sun himself in the Rose Garden.

Corporate democracy, meanwhile, is being reshaped by a motley crew of forces, some focused on the greater good, others on what’s good for them. Among the players: federal bureaucrats; state legislators; large institutional investors loaded with conflicts of interest; unions wielding the power of their pension funds; the Business Roundtable and other lovers of the status quo; and a few colorful individuals like Carl Icahn and Nell Minow.

Like our political democracy, the new shareholder democracy will be subject to capture by the monied and powerful. Not to say that we don’t have this problem already; the velvet ropes outside the C-suite and boardroom are regularly parted so big institutional holders can be ushered in, while you and I, the bridge-and-tunnel shareholders, only know what the Chairman tells us - patronizingly - in the annual report.

Norris worries that, since proxy access makes proxy fights a much greater threat, institutional investors will be able to force management, behind the scenes, to do their bidding. “The greatest threat will not come from contested director elections…but from deals made by companies to avoid such a fight,” he writes. Maybe, he says, the SEC should require companies to disclose whatever compromises they make to avoid proxy challenges.

It's hard to argue with more disclosure. According to a favorite cliché of regulators, after all, sunlight is the best disinfectant. (Though if this were true, wouldn't operating rooms have sunroofs?) The SEC might also consider a "sunset" provision, where they try out proxy access for a few years and then, if they don't like it, they give up. Like a certain Alaskan governor.

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