The SEC turns its attention to the proxy …

July 14, 2010

Over the last 30 years, the mimeograph has given way to PDF, and rotary dial phones have been replaced by voice dialing and Bluetooth headsets. Stock ownership has exploded into the middle class from the ranks of the elite.

Meantime, the U.S. proxy process hasn’t changed much. Now the SEC is thinking about doing something about that, launching its first full review of the process in three decades with a unanimous vote this morning.

We’re still digesting the agency’s proposals — its “concept release” comes out to some 151 pages — but from an investor’s perspective, there’s a lot to be done. Indications are that the agency will focus on a number of key areas, some of which play to investors, while others seem to come straight from the boardroom wish-list. (This morning’s brief meeting was webcast; a replay will be posted online soon. The agency has also posted Chairman Mary Schapiro’s comments, and those of commissioners Luis A. Aguilar and Kathleen L. Casey.)

There’s also every sign that the agency is poised to tackle a potentially serious issue in the capital markets: the separation of a share’s economic and voting interests. Henry Hu, the highly regarded University of Texas law professor who now heads the SEC’s Division of Risk, Strategy, and Financial Innovation, apparently pressed this point eloquently at the Stanford University Law School’s Director’s College last month, we’re told (and the concept release cites some of his academic work) . Some scenarios: Shareholders can short a stock — or hold a net short position on a stock using credit default swaps or other instruments — and yet vote borrowed shares against the best interests of the company.

The SEC says it might address these and similar issues by making sure shareholders know what’s at stake well ahead of a vote, giving them time to reclaim and vote shares that they’ve lent out. Another possibility: requiring funds to disclose not just how they voted, but how many of their shares they voted — letting fund investors know, in effect, how many of the shares in their portfolios were passed along to short-sellers and others. Judging from these, the agency’s approach seems to be one we can get behind: Sunlight, to paraphrase the late, great Supreme Court justice, Louis Brandeis, makes a great disinfectant.

We’re also intrigued by a line in the agency’s fact sheet about encouraging “investor-to-investor communications.” It sounds to us like something that could pave the way to proxy access — letting investors put their board candidates directly in the proxy sent to investors by the company, rather than having to wage an expensive proxy battle with their own mailings — though the concept release is vague.

There’s also a proto-proposal to let companies have more information about who their shareholders are. Right now, in many cases, shareholders can essentially draw the curtain, obscuring their identity, either explicitly or simply because their shares are held in street name. Companies complain that makes it difficult to communicate with shareholders, since they have to go through brokers or other intermediaries. At the same time, we can see plenty of investors enjoying anonymity — investor relations departments may not be inclined to be as democratic as they are when they know who holds a few hundred shares and who owns a few hundred thousand.

Finally, there’s the proxy advisory firm kerfuffle: The SEC suggests it should consider

“enhancing regulatory oversight over the formation of voting recommendations, and requiring eventual public disclosure by proxy advisory firms of their voting recommendations in Commission filings.”

The proposal comes out of concerns that “proxy advisory firms may be subject to conflicts of interest or may fail to conduct adequate research” before making their recommendations. We’ll have to wait and see whether this turns out to be tightly focused on real problems, or whether it becomes a way for unhappy companies to try to stifle their most influential critics.

A lot of these issues, of course, aren’t new, and commissioners and agency staff have telegraphed many of the elements in speeches and other venues in recent months. They’ll take some 90 days to evaluate comments on its tentative proposals before presumably proposing actual regulations and taking comment on those.

Meanwhile, the financial-regulatory overhaul pending in Congress is likely to include still more mandates for the SEC, something Schapiro alluded to last week at a corporate secretaries meeting in Chicago, according to Suzanne Hopgood, director of board advisory services for the National Association of Corporate Directors.

“I think the very threat of the amount of rule-making they’re doing, with the deadlines they have, everybody is very focused at the SEC,” Hopgood told us after hearing Schapiro. “That’s a good thing.”

Image source: spiffie via Flickr

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