Sunday, December 02, 2007

Here Comes the Judge

It's not usually dangerous to read the NYT Sunday Business section. But today they wrote about websites where you can design your own shoes, and now some of us are unable to focus on anything else.

Must try, though, must try…

OK, recapping the last post, the SEC has decided shareholders should not custom-design corporate elections by putting forth their own candidates right in the proxy statement. People on both sides are passionate about this issue, as proven by the 34,000 comment letters the SEC received – not nearly as many as Ashlee Simpson’s nose job would garner if celebrities had to seek public comment on their plastic surgeries, but startling in the world of securities law. Some fear proxy access would unleash some kind of union-led reign of terror, while others paint it as the road to a utopia where all directors will be wise and pure.

Either way, some smart people don’t think the concept deserves the PR it gets. One of these skeptics is The Honorable Leo Strine, Jr., a respected judge on the Delaware Court of Chancery and somewhat of a maverick. (Despite coup attempts by other states, Delaware Chancery remains the most important court in Proxyland, especially when it comes to shareholders’ rights.)

In October Strine published an essay containing trenchant observations about corporate governance (and it's cleverly written, as in “public companies are taking a rough ride on top of life’s mosh pit”). Surprisingly, Strine treats proxy access as a sideshow, warning that institutional investors have acquired “a less responsible and arguably more potent weapon" -- majority voting, which empowers shareholders to oust unpopular directors who are running unopposed. “With this weapon in hand,” says Strine, “institutional investors can pit the incumbent board against a platform of generalized outrage, with the very real threat that generalized outrage will win.”

Strine's view that majority voting may be more subversive than proxy access is unusual. While proxy access lies bleeding on the floor, many companies now use majority voting systems when electing directors, so we must conclude that directors prefer losing elections to “generalized outrage” over losing them to real human beings who will attend board meetings and hog all the doughnuts.

Nevertheless, Strine doesn't think big institutional investors should use slingshots to take out board members without offering alternative candidates. His solution? Allow shareholders proxy access – but only every 3 years – while restoring the old plurality voting system. Under this compromise, he argues, investors could keep CEOs awake by periodically waving around an alternative slate of directors at company expense, and boards could go about their business without the annual threat of an embarrassing electoral defeat at the hands of non-existent opponents.

Strine’s views deserve consideration, so please think this over while we figure out the best heel height for some new boots.

Thank you, Mr. Delaware Litigation Mogul, for picking up this post.