In the Nation's Interest

Is It Good For Shareholders To Have More Rights?

On May 20, the Securities and Exchange Commission proposed regulatory changes to give shareholders the right to nominate directors to corporate boards -- so-called proxy access. Shareholders have fought for access to the proxy for director nominations for a long time. Overall this is a positive step intended to encourage directors to do a better job and to exercise judgment independent from the CEO. I strongly believe that public corporations need engaged and active shareholders.

I worry, however, about the law of unintended consequences and the potential downside risks. My first concern is that this may be a victory over yesterday's problem -- the "imperial CEO" who chose the board, dominated it, and used it as a rubber stamp. If that were still the principal problem, giving shareholders the ability to nominate independent directors not beholden to the CEO would make sense. But the imperial CEO isn't what he used to be. (He might even be a she.) The CEO no longer completely rules the roost -- he may in fact be concerned about keeping his job. The average CEO's tenure dropped from 9.7 years in 1999 to 8.3 years in 2006; the median tenure in 2006 was 5.5 years. In 39 percent of the S&P 500, the CEO no longer holds the additional title of Chairman of the Board, diminishing his power somewhat. New regulations and changes in business practices have promoted director independence, in particular for nominating committees. Certainly, I don't want to imply that the problem has been resolved, but a lot has changed in the past few years.

Another concern is that empowered shareholders may be as much a part of the problem as part of the solution. Shareholders bear a significant part of the responsibility for short-termism and excessive risk taking, which underlie the recent economic downturn. Financial institutions and corporations that over-leveraged and reached for yield often did so at the urging of shareholders who demanded "better" quarterly results. Giving shareholders more power, at this moment, may not be the best route to encouraging a longer-term, more-balanced view of the corporation's place in society: the subjects of two recent CED reports on corporate governance, which promote independent directors -- not directors more dependent on shareholders.

Finally, I wonder what will come next. Advocates claim that proxy access will make boards more sensitive to shareholder concerns about excessive executive pay. Directors who worry about being challenged for re-election might not support large payouts for the CEO and other corporate executives. That is well and good. But if the Congress or regulators then also support "say on pay," which allows shareholders an advisory vote on executive pay structures, or other more-direct proposals to rein in executive pay, might those actions be redundant if not overkill? I'm all for changing the incentives that lead to excessive compensation for corporate executives, but do it efficiently and effectively. Let's not go at it three different ways with three different policies.

In sum, the SEC proposal is a great victory for shareholders. It swings the balance of power in the corporation in the right direction. I support the proposal; we ought to give it a chance to work. A significant part of making it work will fall to newly enfranchised shareholders, who must act constructively to promote the long-term interests of the corporation rather than their own short-term advantages. Another part of making it work will be achieved when the political system stops adding new rules and starts giving the ones we've passed a chance to work.

Commentaries are the views of the authors and do not necessarily represent policies of the Committee for Economic Development.

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