Business leaders are saying thanks but no thanks to shareholder democracy.
The Chamber of Commerce and the Business Roundtable, the lobbying groups representing many of America's biggest companies, sued the Securities and Exchange Commission Wednesday to overturn a rule that ends management's exclusive lock on nominating corporate directors.
The rule, known as proxy access and adopted last month, allows major long-term shareholders to nominate directors to a big company's board without organizing a costly and time-consuming proxy contest.
The idea is to let investors hold directors accountable for corporate performance. SEC Chairman Mary Schapiro has said proxy access aims "to ensure that a company's owners have a meaningful opportunity to nominate directors."
Gadflies such as Nell Minow at the Corporate Library describe proxy access as "a modest and most welcome step forward" in reforming rules that vest almost total control over the composition of corporate boards with the managers who supposedly report to them.
But that's not how the Chamber and Business Roundtable see it. They say the rule would allow the big labor unions whose pension funds own large stakes in many big companies to further pervert corporate decisionmaking, if such a thing is possible, by pressing their own, non-shareholder-focused agenda. They also claim the rules will be costly and ineffective, echoing complaints made by other pro-business types about other financial reform efforts.
"The SEC's proxy access rule empowers unions and other special interests at the expense of the vast majority of retail shareholders," said David Hirschmann of the Chamber of Commerce. "This special interest-driven rule will give small groups of special interest activist investors significant leverage over a business' activities. This will undermine a company's ability to grow and create jobs."
The Council for Institutional Investors, which represents pension funds that have $3 trillion invested, said it will oppose the suit seeking to have proxy access overturned. It called the proxy access rules a key tool for investors dissatisfied with a board's performance.
"The Council fought long and hard for U.S. shareowners to gain the right to have their board candidates considered alongside those of management," said Ann Yerger, the Council's executive director. "Proxy access will make companies more responsive to their shareowners and more vigilant in their oversight of companies. This basic right is widely accepted in many other countries and the Council will fight to preserve it here."
And the claim that big companies are in danger of being taken over by union-nominated directors – socialists, in effect – is not winning over the likes of Minow. Indeed, she sees just the opposite happening.
"Market forces will operate far more efficiently if board members are subjected to even the very small market test of a very limited ability for shareholders to put alternate candidates to a vote," she wrote last month after the SEC adopted its rule. "The complaints of those who see specters of 'special interests' are hypocritical and disingenuous. No one will be elected to the board without the support of more than 50% of the shareholders."
But the Chamber is just getting warmed up. It also claims the SEC adopted the rule without sufficiently weighing its risks and rewards. A court will decide on the veracity of that claim, but at the very least the Chamber may have coined a new catchphrase in the neverending war on faceless bureaucracy.
The SEC, charges Robin Conrad of the National Chamber Litigation Center, "failed to engage in evidence-based rulemaking."
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