Corporate Governance

As Predicted: The SEC and the Further Denial of Shareholder Access (The Difficulty Finding Qualified Directors Shibboleth)(Part 6)

By J. Robert Brown

CA presented a litany of horrors that can result from AFSCME's proposal. It would "undoubtedly . . . increase the number of short-slate proxy contests" and in so doing, this could "impair CA’s ability to attract accomplished candidates to serve as directors."

Two observations about the comment. First, there is nothing "undoubtedly" about the likelihood of an increase in the number of contests. Indeed, logic suggests that in fact it will not increase the number of contests. The notion of an increase would only occur because it removes on impediment to a contest -- the obligation of the insurgent to absorb the costs of running an anti-management slate. The AFSCME proposal, however, only required repayment if a dissident director was elected. As Bebchuk's data shows, insurgents usually lose proxy contests. As he notes:

• " About two-thirds of the challengers lost. The absolute numbers make the picture especially stark: putting aside contests over a sale of the company or open-ending a closed-end fund, rivals seeking to oust incumbents succeeded in gaining control in only eight companies with a market capitalization above $200 million during the decade."

This proposal would only cause a contest to go forward if the insurgent already believed that he or she would win. In those circumstances, the repayment of costs would be only one factor in the shareholder's decision to engage in the contest. As for other proxy contests -- where the shareholder knew that a victory was unlikely -- this proposal would provide no incentive to go forward.

As for the argument that an increase in the number of contests (itself unproven) would make it more difficult for CA to attract accomplished candidates, this is a supposition built on a supposition. First, it is the argument that is always trotted out anytime anyone suggests a change to the status quo. It was one of the arguments made against access. When the SEC proposed requiring companies to disclose whether any director failed to attend at least 75% for the meetings, the central objection was, you guessed it, that some commentators "were concerned that the disclosure would discourage highly qualified nonmanagement directors from serving on boards." Exchange Act Release No. 15384 (Dec. 6, 1978).

Even CA argues only that the threat of a contest "could impair CA’s ability to attract accomplished candidates to serve as directors."  In other words, it might or it might not.  Moreover, while it "could" impair the ability to attract accomplished candidates, CA did not and could not make the argument that it could make it impossible to find an adequate number of qualified candidates.  At most, the argument does little more than say some candidates might be discouraged by the threat without arguing that the entire pool of possible candidates had become inadequate. 

Finally, the Company disclosed in its July 2007 proxy statement that it paid directors in the vicinity of $175,000 in total compensation.  While this is not the kind of fees paid at Goldman Sachs, there is no empirical evidence that suggests that fees at this level will be inadequate to attract a qualified board, even with the additional "risk" of an increase (unproven) in the number of proxy contest.    

Full post as published by The Race to the Bottom on July 08, 2008 (boomark / email).