When market commentators talk about corporate governance they often refer to the “Anglo-American Model” of governance, as opposed to the EU’s stakeholder orientated approach. Friday’s decision by the US courts to reject shareholder “proxy access” should leave observers in no doubt that there’s nothing much “Anglo” about the American approach to governance.
Despite shareholders’ ability in many Commonwealth and European countries, as well as Japan, to nominate their own directors on the annual proxy ballot (a right which has existed in the UK since the reign of Queen Victoria), the U.S. Court of Appeals for the District of Columbia Circuit has determined that proxy access is “arbitrary and capricious.” Furthermore, such rights would leave US companies open to special interest lobby groups according to the U.S. Chamber of Commerce and the Business Roundtable, the two high profile special interest lobby groups for quoted companies behind the court case.
Council of Institutional Investors Executive Director Ann Yerger has gone on record expressing disappointment over the rule’s rejection. “The court’s decision is deeply disappointing to long-term shareowners. We think the court got it wrong. We will continue to advocate for proxy access and will encourage the SEC to promptly address the court’s concerns. Proxy access is a core shareowner right that is standard in many countries. It would invigorate board elections and make boards more responsive to shareowners and more vigilant in their oversight of companies.”
In his opinion document for the court Judge Douglas Ginsburg said the SEC “relied upon insufficient empirical data” when it determined that the rule would “improve board performance and increase shareholder value by facilitating the election of dissident shareholder nominees.”
He noted that the SEC “inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters.”
On the plus side for shareholders, the court did not agree with the plaintiffs’ claims that proxy access rules are fundamentally unconstitutional, leaving open the possibility that an access regime could be implemented in revised form in the future if the the cost/benefit issues are properly addressed by the SEC. In a statement SEC spokesman Kevin Callahan said: “We are reviewing the decision and considering our options.”
Although there is widespread disappointment in the governance community at the court’s decision, many agreed that the rule was less than perfect and had a tough time getting through the US law making process in the first place. It’s worth taking a look at Jim McRitchie’s blog for an insiders view of what should be done better next time.
Last Updated: 24 July 2011