The Insignificance of Proxy Access

Proxy access is the right of shareholders to nominate directors and to have their nominees included in the company’s proxy statement. Because proxy access is viewed as dramatically lowering the costs of an election contest, both proponents and opponents of proxy access predict that it will have a significant impact. Contrary to this conventional wisdom, we argue that proxy access will lead to few shareholder nominations, that most of these nominees will be defeated, and that the occasional nominee who may get elected will have little impact.

Based on past involvement in shareholder activism, we believe that neither mutual funds nor private pension funds would make significant use of proxy access. Certain large public pension funds have shown a modest interest in activism and may make some nominations. The entities with the greatest interests in activism hedge funds and union-affiliated funds-would generally not satisfy the ownership and holding period requirements.

When compared to traditional proxy contests and to withhold campaigns, proxy access involves significant disadvantages while promising only modest advantages. The cost savings of proxy access compared to traditional contests are overstated because most proxy contest expenses are discretionary campaign expenses or relate to other expense items that are unaffected by the proxy access rule. By contrast, the limitations that come with proxy access are significant: the number of nominees a shareholder can propose is limited; the level of shareholder support required to gain a seat, as a practical matter, is increased; the company retains control over the design of the proxy cards; and the company retains exclusive access to preliminary voting information.

When compared to withhold-vote campaigns, proxy access has the advantage that, if it succeeds, it results in the election of a dissident director. But this benefit must be weighed against countervailing factors that reduce the likelihood of success: the higher level of shareholder support required for success, the greater challenge of positive versus negative campaigning, and the vulnerability of the dissident shareholders and their nominees to attacks by the company for lack of qualification or conflicts of interest. Such attacks will resonate especially for nominees by unions and public pension funds and may make it difficult to find qualified nominees.

Overall, we believe that proxy access would have some undesirable effects-it would result in some increase in company expenses and may, rarely, increase the leverage of shareholders whose interests conflict with those of shareholders at large-and some desirable effects-it may occasionally lead to the election of nominees to recalcitrant boards, where such nominees may have a modest impact on governance and a marginal impact on company value. None of these effects is likely to be very material, and the net effect is likely to be close to zero.