Frankly, now that financial markets reform has moved from the Congressional shadowboxing stage to the arm-wrestling in smoke-filled room sort-out-the-details-that-matter stage, the retreat from public scrutiny has, of course, served as a cover for further watering down of measures that were not very strong to begin with.
Yesterday we noted that major companies were outraged at the notion that major institutional shareholders might be able to propose board candidates. The argument in effect was that the odds were high that shareholders, a group that clearly can’t be trusted to make sound financial decisions, would immediately vote in a hedge fund or union stooge who would destroy the enterprise. The SEC was nevertheless expected to pass the measure on a party line vote.
Well, we learn today that they did, with a wee wrinkle. They chose the weakest variant of the measure being contemplated. As the Financial Times noted on Tuesday:
The proposal allowing investors to put their own nominees for board seats alongside the company’s nominees is expected to be approved by the Securities and Exchange Commission…
The new power is expected to be restricted to investors with a 3 per cent or greater stake in the company who have held the shares for at least two or three years, people close to the situation said. The SEC commissioners have the power to exempt smaller companies from the rule, should they wish to do so.
Despite this setting a new precedent, the 3% hurdle is a daunting level, since as I read the SEC’s announcement, this is the level required for a single shareholder. And the SEC further decided upon the longer holding period of three years.
Pray tell, how many companies even have shareholders that meet these criteria? The Business Roundtable must be quietly chuckling over this win.
Update 5:00 PM: Jim Ledbetter provides an answer to the question above. Superficially, the number of 3% shareholders looks larger than I thought, but there is also reason to believe the overall stats mean less than one might imagine. From his post:
As part of its deliberation over this rule, the SEC produced a study that combed through the filings of 6,416 companies in late 2008. According to the study, 33 percent of companies have one or more shareholders who meet the 3 percent, three-year thresholds; 10 percent have two or more shareholders; 4 percent have three or more; 1 percent have four or more; and no one has five or more. That alone implies that the rule would cover more than 2,000 companies.
Yves here. That means based on a narrow reading of the rule, less than 1/3 of the companies fall into the category of having a shareholder that can nominate a board member. And perhaps most important, the rule allows a 3% group to nominate only one board member per proxy, not a slate, so the impact is limited (this was a key point I neglected to mention).
The open question is how many of these 3% are independent. You have quite a few public companies where the founders/early owners still hold large stakes (think Microsoft and Oracle as positive examples, HealthSouth as a big negative). You also have cases where individuals and families wind up with large stakes by having sold a business to a large company and getting shares rather than cash as consideration (shares are not taxed until sold). In general, individuals and family offices are far more likely to be long term shareholders; institutional investors generally trade more often, since they are more short term return driven, while individuals often care more about after-tax returns.
A good bit of news, however, Ledbetter dug into the SEC rules (I was not able to find it quickly on the site last night, my bad, and the SEC’s several page summary was ambiguous on this point) and his reading that shareholders can cooperate to get to 3% (but then why the study on individual shareholders?)