Shareholder Access to the Proxy AFL-CIO Fact Sheet

The Securities and Exchange Commission (SEC) recently proposed historic new rules that could, for the first time, give long-term investors a meaningful say in selecting boards of directors. The following is a brief summary of what investors should know about this critical investor reform, and what they can do to ensure that the SEC adopts final rules that give shareholders timely and effective access to the proxy. The complete SEC rule proposal is posted on the SEC website (http://www.sec.gov/rules/proposed/34-48626.htm).

What is shareholder access to the proxy?

Access to the proxy refers to the right of long-term shareholders to include their nominees to corporate boards of directors in the proxy materials mailed by corporations to all of their shareholders. This right is not currently available to shareholders.

Why is access to the proxy so important?

Investors expect the directors they ostensibly elect to be open and responsive to shareholder input on issues facing the company, willing to challenge management with tough questions and goals, and prepared to take independent action when needed to maximize the long-term value of the corporation. As recent corporate scandals illustrate, too many boards fail to meet these fundamental standards, and the current incumbent-dominated director election process denies shareholders the ability to hold these directors accountable for their performance. That is because under the current election process shareholders vote only on candidates nominated by the directors themselves, a practice that allows CEOs to handpick their own directors.

Although state law permits shareholders to run director candidates, this fundamental shareholder right remains effectively unavailable so long as shareholders’ nominees are denied equal access to the corporate proxy. As a result, incumbent directors can freely spend the corporate treasury to get re-elected while shareholders must mount costly proxy contests that are hard for particular investors to justify absent a battle for corporate control (the costs to print and mail proxy materials alone can run into the millions). With no real ability to cost effectively run directors, shareholders can do little more than rubberstamp a company’s nominees.

Who supports shareholder access to the proxy?

This critical reform enjoys broad investor support, including from the 165 unions, pension funds, institutional investors and institutional investor associations that sent supporting comments to the SEC as part of its recent review of the proxy rules governing director nominations and elections. The AFL-CIO, whose affiliated unions sponsor benefit plans with $400 billion in assets, took the opportunity of the SEC review to file a rulemaking petition seeking access to the proxy.

Supporters include the California Public Employees' Retirement System, the nation’s largest pension fund; Barclays Global Investors, the world’s largest institutional investment manager; and the Council of Institutional Investors, whose members’ assets exceed $2 trillion. In total, the SEC received 690 comment letters, overwhelmingly in support of access to the proxy, including 424 from individual investors. In addition, a recent Harris Poll found that 8 of 10 investors want the right to offer investor-nominated board candidates through the proxy ballot.

Who opposes shareholder access to the proxy?

The Business Roundtable, which is composed of the CEO’s of the 150 largest companies, is leading the opposition to the rules. Other opponents include the corporate bar, the National Association of Corporate Directors, and the Investment Company Institute, which is the trade association for the mutual fund industry.

Why aren’t recent regulatory reforms sufficient to address director accountability?

In response recent corporate scandals and the Sarbanes-Oxley Act, the SEC adopted a broad set of reforms, including new rules to enhance the independence of audit committees and outside audit firms, and is expected to approve new exchange listing standards to strengthen the independence of the board of directors and its key committees. Opponents to access to the proxy argue that these reforms are sufficient to address the kinds of accountability concerns that have undermined investor confidence in our capital markets, and are wary of further regulation.

In fact, these recent regulatory reforms address director conflicts, not accountability. Though essential to rein in the conflicts of interest that can compromise directors’ loyalty to the corporation and its shareholders, recent regulatory reforms cannot ensure that directors act independently, are responsive to shareholder concerns and contribute to building the long-term value of the corporations they serve. By making meaningful the right to nominate directors that shareholders already ostensibly enjoy under state law, new rules granting access to the proxy would empower shareholders and thereby lessen investors’ reliance on regulatory oversight.

Are the SEC’s proposed rules sufficient?

The proposed rules adopt the basic principle of giving long-term investors a say in the election of directors. They also contain safeguards—including significant minimum ownership and holding period requirements for shareholders, and strict limitations on the number of shareholder nominees—to ensure that they cannot be used to facilitate hostile takeovers by short-term investors or lead to potentially frivolous nominees at numerous companies.

However, as proposed, the rules also contain unwarranted triggering requirements that would make it difficult for even the largest investors to use them, and impossible to do so in a timely manner. First, the proposed triggers mean that up to two years must pass between the time shareholders wish to nominate a candidate and when one could actually be elected. Second, the SEC’s proposed 1 percent ownership requirement for shareholders to submit an “triggering” proposal is far too high. Rarely, if ever, do the institutional investors that sponsor shareholder proposals own even 1/2 percent of a company.

TAKE ACTION! Tell the SEC you support proxy access rules that investors can use.

Click here to send a comment letter to the SEC voicing your strong support for final SEC rules that truly give shareholders a voice in picking corporate directors at America's largest corporations. The SEC's comment period ends Dec. 22.