Shareholder Democracy and the Sec's Proxy Rules: In the Boardroom

Summary

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Although shareholder activism has progressed in recent years, the 2008 financial crisis confirms the need for further changes. The legal structure underpinning contemporary American corporate governance has failed shareholders. While some companies found allowing shareholder access to proxy statements threatening, supporters argued that Rule 14a-8's purpose is not to force change on a company, but to get the attention of its board and senior management, promote dialogue and, when appropriate, conduct a shareholder referendum on issues of concern. The 2008 financial crisis only strengthens the argument for shareholder democracy. Shareholders have long pressed for a greater role in nominating directors, reasoning that a director nominated by investors would analyze issues with investor concerns in mind, would represent those concerns in boardroom discussions, and would help remind other board members that their paramount duty is to company shareholders, not management.

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Extract

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Shareholder Democracy and the Sec's Proxy Rules: In the Boardroom

I. INTRODUCTION

Although shareholder activism has progressed in recent years, the 2008 financial crisis confirms the need for further changes.1 The legal structure underpinning contemporary American corporate governance has failed shareholders. "[T]here are still problems in exercising basic shareholder rights in many U.S. listed companies, because shareholders often have limited influence over the election of their board members" wrote the chief of the investment arm of Norway's central bank in a letter to S.E.C. Chairman Christopher Cox.2

Two prominent examples, Enron and Lehman Brothers, highlight the status quo's problems. The failure of Enron's board of directors to safeguard shareholders contributed to the company's collapse. In its 2002 report, the U.S. Senate Permanent Subcommittee on Investigations concluded that Enron's board allowed the company:

[T]o engage in high risk accounting, inappropriate conflict of interest transactions, extensive undisclosed off-the-books activities, and excessive executive compensation. The board [also] witnessed numerous indications of questionable practices by Enron management over several years, but chose to ignore them to the detriment of Enron shareholders, employees and business associates.3

There was reason to be optimistic about governance c...

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