Academic

There is lots to talk about with the new proxy access rule, but one thing I have been trying to sort out is how I feel about the impact of proxy access on issues of director independence.  There is of course considerable debate about whether proxy access will improve corporate governance.  In its final rule, after "considering the costs and benefits identified by commenters," the SEC had this to say about that debate.  "[W]e believe that the totality of the evidence and economic theory supports the view that facilitating shareholders' ability to include their director nominees in a company's proxy materials has the potential of creating the benefit of improved board performance and enhanced shareholder value. . ."  In this regard, the SEC also indicated that "new shareholder-nominated directors may be more inclined to exercise judgment independent of the company's incumbent directors and management."

To be sure, there is also considerable debate about whether shareholder-nominated directors can be viewed as independent.  But then one must ask the familiar question, "independent from whom?"  As the SEC suggest, such directors are likely to be "independent" from current management and directors.  On the one hand, some proxy access opponents contend that this kind of "independence" could result in the election of disruptive board members who undermine good board governance.  On the other hand, studies regarding structural bias suggest that the process of being part of a board may mean that even directors with no prior connection to an incumbent board and management may develop ties that make them biased towards their fellow board members, which is no less than one would expect from people who work closely together.  Nevertheless, given the current state of a board/management-dominated election process, it is hard to argue with the premise that proxy access may result in the election of directors more independent from incumbent directors and management than the existing process.

But then, proxy access opponents are not concerned about new directors' independence from management, but rather their independence from the shareholders who nominate them.  With regard to this issue, the SEC did seek comment on whether shareholder-nominated candidates should be required to be independent from their nominating shareholder or group.  While many commenters supported some limitation on the affiliation between the two, the SEC concluded that such limitations were "not appropriate or necessary."  In its view, disclosure requirements and state fiduciary duty rules should help limit concerns that shareholder-nominated directors will advance shareholder-specific issues to the detriment of the broader shareholder class or otherwise feel beholden to the shareholders who nominate them.  Hmmmm...

On the one hand, it may be possible that the fact that candidates must disclose their relationships with their nominating group will prove sufficient to weed-out candidates likely to advance special interests, particularly because corporations will have the opportunity to highlight such candidate's propensity in their proxy materials.  Although there is also reason to be skeptical about this point.

And what about state fiduciary duty law?  In several places the SEC noted that shareholder-nominated directors, once elected, would be subject to the same fiduciary duty as other directors.  Perhaps this is enough.  However, one can certainly be skeptical about the ability of fiduciary duty law to shape directors' behavior.  Indeed, as we are all aware, that law generally contains a very high threshold for holding directors liable for breaching their fiduciary duty outside of the conflict of interest realm.  Then too, while economic ties may raise different concerns, it is very hard for any social ties of the kind that may exist between shareholders and their nominees to be viewed as compromising a director's independence.  From this perspective, it is not clear how far fiduciary duty law will get us.

Of course, in many ways, the concern regarding the influence of shareholders over their director-nominees reflects a recognition that nominees may feel beholden to those who nominate them--whether other shareholders or management.  Then perhaps the question becomes, which type of potential beholdenness poses the greatest risk for good corporate governance?