The SEC, the Business Roundtable and an Appropriate Alliance
The Business Roundtable sought permission to file an amicus brief on the side of the SEC in the Citigroup case. We have posted the brief on the DU Corporate Governance web site.
At first glance, this may seem to be the case of strange bedfellows. After all, it was the Business Roundtable that challenged the SEC’s shareholder access rule and essentially helped generate an opinion from the DC Circuit that will bedevil rulemaking endeavors for years to come. For an article criticizing that decision, see Shareholder Access and Uneconomic Economic Analysis: Business Roundtable v. SEC.
But in fact the connection is a natural one. To see the two as strange bedfellows is to see the role of the SEC as anti-business. It is not. The Commission’s goal of ensuring efficient capital markets benefits all participants. It may be the case that in ensuring an appropriate regulatory regime the Commission sometimes tilts in favor of investors and shareholders. But this is in large part a consequence of a shareholder unfriendly regulatory environment in Delaware. It is a restoration of a necessary balance.
Still, it seems as if the Business Roundtable and the SEC often find themselves on opposite sides. Shareholder access is an obvious example. What explains this? It is not that one has a pro and the other an anti -business approach to regulation. The difference is horizon.
In the shareholder access case, those challenging access essentially sought to preserve the status quo. The status quo is that directors are nominated by the board (often with considerable influence from the CEO, something chronicled in Essay: Neutralizing the Board of Directors and the Impact on Diversity) and elected by shareholders in a Soviet style contest (this is true even with majority vote provisions).
As a result, directors often do not represent the interests of shareholders. Under this electoral approach, there have been repeated breakdowns at the board level that have spurred calls for additional regulation, whether the failure to monitor for fraud that contributed to the pressure for Sarbanes Oxley or the failure to monitor for risk that contributed to the adoption of Dodd Frank.
The status quo leaves in place a system that has resulted in a cycle of board failure followed by federal intervention and increased regulation. Certainly this can be seen most clearly in the area of executive compensation, with the SEC now regulating compensation committees, overseeing say on pay, policing clawbacks, and banning practices that induce excessive risk taking.
Access alters the status quo but it also likely alters the cycle of board failure followed by increased federal regulation. Access, under the model put forward by the SEC, limited the authority to long term investors and only permitted the election of a minority of directors on the board. The presence of these directors in the boardroom would likely result in increased oversight of critical areas such as risk management and executive compensation. Access challenges would also provide shareholders with an outlet for their frustration with management and reduce the need to seek a regulatory solution.
Finally, the presence of shareholder nominated directors would probably stiffen the spine of the remaining directors and, at least in some cases, increasing the degree of oversight. Under the current configuration, no one on the board wants a reputation as a trouble maker or someone who can be counted on to oppose the CEO. This no doubt stifles genuine disagreement. But if the disagreement is initiated by shareholder nominated directors, the others have more room to participate.
In other words, access holds the promise that by changing the status quo the inevitable dynamic of board failure followed by increased regulation will be allayed. It is a long term benefit but one that trumps the short term consequences. For now, however, the status quo remains in place and, as a result, so does the cycle of breakdown and regulation.