Volume 3, Issue 1 (2013)

It is well known that U.S. director elections are largely a formality: incumbents typically nominate themselves, for elections that are almost always uncontested, and are re-elected with virtual certainty. The result, as illustrated by the recent debacle at J.P. Morgan Chase, is what one might expect: directors who are elected not for their qualifications but rather because shareholders simply have no other choice. In the aftermath of the 2008/2009 financial crisis, efforts were made to improve corporate democracy. The introduction of majority voting, the introduction of eProxy rules, and elimination of broker voting of uninstructed shares were predicted to dramatically improve the vibrancy of the director election process. Our analysis, based primarily on data from the 2007–2011 proxy seasons, indicates that these reforms have been ineffective in achieving their stated goals. Specifically, we find that: (1) only two incumbent directors who did not receive a majority of the votes cast have actually left their boards; (2) not a single insurgent candidate has made use of eProxy; and (3) only one director election outcome has changed due to the elimination of broker voting of uninstructed shares. We also find no evidence that these reforms have influenced the “shadow” negotiation between the board and major shareholders in favor of shareholders. In contrast to these reforms, our research suggests that a properly designed proxy access regime has the potential to meaningfully improve the director election process at U.S. corporations.

Shareholder voting has become an increasingly important focus of corporate governance, and mutual funds control a substantial percentage of shareholder voting power. The manner in which mutual funds exercise that power, however, is poorly understood. Because of the economic structure of mutual funds, there are particular reasons to be concerned about the extent to which mutual funds may seek to economize on the cost of their voting decisions by employing short cuts or delegating voting decisions to proxy advisors. These concerns, if true, hamper the potential effectiveness of regulatory reforms such as proxy access and say on pay.

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Two parallel real estate bubbles emerged in the United States between 2004 and 2008, one in residential real estate, the other in commercial real estate. The residential real estate bubble has received a great deal of popular, scholarly, and policy attention. The commercial real estate bubble, in contrast, has largely been ignored.

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Since 1987 there have been many significant, positive changes in the manner in which boards of American public companies conduct themselves. In our first book published in 1989, Pawns or Potentates: The Reality of America’s Corporate Boards, Elizabeth McIver and I found that boards were acting more like pawns and not so much as the potentates they were legally intended to be. By 2001, Colin Carter and I concluded in Back to the Drawing Board: Designing Boards for a Complex World that many, if not most boards of public corporations had adopted new “best practices” and were trying to live up to their legal obligation to be potentates. Many boards, however, in the United States and other countries, were still struggling to meet these legal expectations. Despite all of the progress that has been made, boards still face many difficulties, especially oversight of complex multinational corporations and companies that operate several lines of business.

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In March 2011, our law firm (Wachtell, Lipton, Rosen & Katz) formally petitioned the Securities and Exchange Commission to modernize the rules promulgated under Section 13(d) of the Securities Exchange Act of 1934. The petition sought to ensure that the reporting rules would continue to operate in a way broadly consistent with the statute’s clear purposes, and that loopholes that have arisen by changing market conditions and practices since the statute’s adoption over forty years ago could not continue to be exploited by acquirers, to the detriment of the public markets and security holders. Among other things, the petition proposed that the time to publicly disclose acquisitions of over 5% of a company’s stock be reduced from ten days to one business day, given investors’ current ability to take advantage of the ten-day reporting window to accumulate positions well above 5% prior to any public disclosure, in contravention of the clear purposes of the statute.

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This Article provides an overview and analysis of the work that the Shareholder Rights Project (SRP) undertook on behalf of a number of institutional investors during 2012, the SRP’s first full year of operations. During 2012, the SRP worked on behalf of SRP-represented investors on board declassification proposals submitted for a vote at the 2012 annual meetings of 89 S&P 500 companies, and this work has produced substantial results.

Joshua L. Boehm