On October 8th, we filed our response to the following SEC proposed rules:
1. Shareholder Proposals. Other Release No.: IC-27913. File No.: S7-16-07 and
2. Shareholder Proposals Relating to the Election of Directors. Other Release No.: IC-27914. File No.: S7-17-07.
In our response, we note the following:
- Our position with respect to capital markets regulation recognizes the primacy of protecting investors. Investor interests, broadly speaking, are not served by growing levels of fraud and malfeasance. As is clear from recent events, securities laws have failed both to protect investors and to promote efficiency. “Facilitating the exercise of shareholders’ rights” will help prevent fraud from occurring.
- We recognize that the right to submit shareholder resolutions impacting corporate operations, governance and ownership has economic value, like any option. This option value was first uncovered by faith based investors, who found their ability to implement positive social change diminished as the social order moved to a market-based culture. Submitting shareholder resolutions allowed them to move with the social order. This strategy has been co-opted by certain hedge funds, now using the practice for selfish, potentially destructive purposes.
- Any significant concerns about expanding proxy access rests with these hedge funds, by their nature neither long term investors or sensitive to broader social concerns. We suggest the SEC permit hedge funds to make their proxy voting records public, as mutual funds are required to do. To incentivize this suggestion, the Commission should rule that those hedge funds choosing not to make their proxy voting records public forfeit any legal right to file shareholder resolutions.
- The 5% ownership threshold proposed in File Number S7-16-07 and S7-17-07 should be much lower. The threshold should tie to length of ownership. For owners holding the stock over 10 years, there should be a nominal requirement based on number of shares held, say, 100 shares, and a pledge to hold onto the stock for another 10 years. For five year holders, there should be a 1,000 share requirement, and a pledge to hold onto the stock for another 5 years. For one year holders, there should be a 10,000 share requirement.
- The 5% ownership threshold is equivalent to a “poll tax,” effectively disenfranchising large groups of investors. Fraud in the marketplace (detailed in our comments) mandates that options for exercising shareholder rights be enhanced, not diminished.
- The exercise of voting rights without an economic interest in the underlying security should be disallowed. This is an administrative anachronism created by the fact that publically traded companies do not register individuals as owners of their shares.
- Any person serving on any corporate board signs a binding contract to act as a fiduciary. This means putting the interests of all shareholders first, so, legally, there are no “special interest directors.” Having an interest in and advocating for a long term issue of perceived future significance to a corporation need not be inconsistent with competent board service.
We believe the reference to “states rights” is code for an attitude that supports the resistance of certain entrenched corporate interests to the rights of outside shareholders who are not part of management. Federal law should dominate, given that state law failed to stop the fraud and malfeasance noted.
- The fundamental problem is the continuing and legal disenfranchisement of the majority of shareholders. To fully address the proxy access issue means first addressing two regulatory loopholes: those that allow hedge funds to operate without supervision and those that allow publically traded companies to avoid registering individuals as owners of their shares.
 In fact, if there are any “special interest directors” currently serving on corporate boards, they are those whose sole interest is self enrichment at the expense of other shareholders.