Changing the Proxy Rules I

The Securities and Exchange Commission has under consideration two proposed changes to the proxy rules. Whatever change it makes will be a relatively minor adjustment to the system of "corporate governance" prevailing in the US at the moment, but there are issues of principle involved, so let's talk about this for a bit.

In fact, I'll make this a three parter, so if you're fascinated by today's entry, you'll be sure to check in tomorrow and Monday! If you're nodding off already, set the alarm for Tuesday.

For those still here: A corporation typically has a hierarchy of managers, with the C-suite at the top (CFO, COO, CEO). The managers are responsible to the board of directors, who are in some sense or other -- this is the nub -- responsible to the whole body of stockholders, the owners of the company.

The specific relations between shareholders, the board, and the management are known, generically, as "corporate governance," which I'll just abbreviate CG hereafter. Most of the CG rules are set by Delaware, where the major US corporations are generally chartered. Other states folow its lead, and any regulations at the federal levels have to build on that foundation. It is Delaware's law that requires an annual meeting, that provides for the election of directors at that meeting, that determines the issues on which the shareholders have a right to vote, and that supplies a quorum requirement.

It was a judge (technically, a vice-chancellor) in that state, Leo Strine, who in a decision handed down five years ago spelled out the reason why stockholders who disagree with the policies of a particular board of directors have a right to nominate their own alternative slate of directors and wage and campaign to elect them instead of the incumbents.

"As the nominating process circumscribes the range of choice to be made, it is a fundamental and outcome-determinative step in the election of officeholders," Strine said. "To allow for voting while maintaining a closed selection process thus renders the former an empty an empty enterprise."

So much for the foundations. Tomorrow we'll talk about what the SEC is proposing to do about the proxy/election process.