Last week, on the eve of proxy and AGM season – the annual moment when companies are directly accountable to their shareholders – two important figures in the governance and investment world made noteworthy statements regarding shareholder rights and responsibilities. SEC Commissioner Daniel Gallagher, and to a lesser extent Delaware Supreme Court Chief Justice Leo Strine, each offered a narrowing vision of shareholder involvement in the companies they own.
Commissioner Gallagher’s March 27 speech starts on a familiar path of opposition to the governance reforms embedded in Sarbanes-Oxley and Dodd-Frank, but spends most of its time specifically criticizing the ability of U.S. shareholders to put proposals on company proxy ballots. These proponents, Gallagher says, represent fringe activist interests who lack substantive interest in the companies where they propose, and their proposals impose undue burdens on the companies who receive them. What is missing from Gallagher’s argument to roll back this right, is any sense that this would serve to protect shareholders – the SEC’s primary mission – or that shareholders, who presumably know their interests, want their rights reduced in this way.
Chief Justice Strine, writing in the Columbia Law Journal, rails more generally against what he terms “direct shareholder democracy,” where transient majorities of time-strapped shareholders, sometimes led astray by short-term activist interests, meddle with company decision-making through a sort of corporate governance “Model U.N.” Strine proposes a number of reforms, including reducing the number of shareholder votes (especially say-on-pay), and limiting shareholder proposals along similar lines to Commissioner Gallagher. More encouragingly, while he does not call for full proxy access, Strine advocates for the reimbursement of proxy expenses for dissident nominees (even if not successful), in order to enable investors to make meaningful choices among directors, without requiring full blown proxy contests. Strine says he is not proposing to roll back shareholder rights: but his vision is explicitly intended to reduce and narrow the channels by which shareholders influence, or even engage with, company decisions.
In notable contrast, BlackRock CEO Larry Fink’s brief letter to S&P 500 CEOs last week provides a simpler and more positive vision. The letter’s primary focus is a concern that companies may starve long-term investment in response to short-term pressures. It simply asks each company to engage with its shareholders, and to explain how its investments will produce long term returns. By dint of its size alone, BlackRock can command the attention of S&P 500 CEOs. For other investors, mechanisms like shareholder proposals, say on pay and, potentially, proxy access, provide important conduits to ensure that their boards of directors and management teams remain focused on long term value creation.
Shareholder rights and protections are further monitored in GMI Analyst. This week’s Governance Insight Alert includes 20 companies whose ESG and accounting risk profiles have been affected by recent events.
Read more articles on corporate governance and other topics at the GMI Blog.
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