A US appeals court decision late last week on the so-called proxy access rule, which would have made it easier for investors to nominate corporate board members, represents a serious blow for a group of US pension funds who had sought a greater voice at companies.
They had put their weight behind the Securities and Exchange Commission’s fight against a challenge from business lobby groups the Business Roundtable and the Chamber of Commerce which has now been upheld.
The rule, part of the wider Dodd-Frank legislation in the wake of the financial crisis, would have required firms to include shareholder board candidates on their proxies, if the investors could show 3% ownership of the stock for three years.
Investors such as CalPERS argue the rule would “level the playing field” for director elections and bring greater accountability.
But the Court of Appeals for the District of Columbia Circuit on Friday said the SEC’s rule was “arbitrary and capricious” and that the SEC had failed to consider the economic consequences.
A group of investors (full list below) – with trillions in combined assets and millions of beneficiaries or participants – had put their names to an amicus brief put forward in support of the SEC that was organised by the Council of Institutional Investors and TIAA–CREF earlier this year.
In the document, the pension funds argued that the current proxy process “can exacerbate agency costs by rendering shareholders largely voiceless”. Without the realistic prospect of being removed, they said, “directors can fail to act in the long-term interests of the corporation, with disastrous results.”
The court’s decision on Friday was met with a chorus of disappointment from investors. “As a long-term investor, CalPERS is discouraged that the court decided to invalidate the Commission’s action,” said Anne Stausboll, CalPERS’ CEO. She said it was a “missed opportunity”. She added the fund would continue to advocate a “meaningful” proxy access rule.“The court’s decision is deeply disappointing to long-term shareowners,” said Ann Yerger, executive director of the Council of Institutional Investors. “We think the court got it wrong.” The CII plans to continue to press for proxy access – and encourage the SEC to promptly address the court’s concerns.
“We are disappointed by today’s decision striking down a rule that made it easier for shareholders to nominate a candidate to a company’s board of directors,” said Meredith Cross, Director, Division Of Corporation Finance at the SEC. “We are considering our options going forward.” Cross pointed out that the SEC rule allowing shareholders to submit proposals for proxy access was unaffected by the court’s decision.
The investors backing the brief included (AUM in parentheses):
- CalPERS ($220bn)
- CalSTRS ($141bn)
- Colorado Public Employees’ Retirement Association ( $38.3bn)
- New Jersey Division of Investment ($62.9bn)
- New York City Employees’ Retirement System ($36.7bn)
- Teachers’ Retirement System of the City of New York ($36.8bn)
- New York Fire Dept. Pension Fund ($6.8bn)
- New York City Police Pension Fund ($21bn)
- New York State Common Retirement Fund ($130bn)
- North Carolina Retirement System ($69.7bn)
- Oregon Public Employees retirement Fund ($21bn)
- Washington State Investment Board ($76.7bn)
- State of Wisconsin Investment Board ($67bn)
- TIAA–CREF ($434bn)