Institutional investor-backed US shareholder rights campaign under fire from SEC Commissioner

SEC’s Gallagher attacks Lucian Bebchuk’s Shareholder Rights Project

An institutional investor-backed shareholder rights campaign led by Harvard University corporate governance expert Lucian Bebchuk has come under heavy fire from Securities and Exchange Commissioner (SEC) Daniel Gallagher.

The Shareholder Rights Project (SRP) – whose advisory board has included former SEC Chairman Richard Breeden and former CalPERS General Counsel Peter Mixon – drafts shareholder proposals at US firms seeking to curb so-called “staggered” director elections in favour of annual elections.

Investors backing the SRP, run by law professor Bebchuk, this year include the Florida State Board of Administration, the Illinois State Board of Investment, the Nathan Cummings Foundation, the North Carolina Department of State Treasurer and the Ohio Public Employees Retirement System. They control a combined $300bn and more than 2m members. Previous investor backers include names such as the Los Angeles County Employees Retirement Association (LACERA) and the Massachusetts Pension Reserves Investment Management Board (MassPRIM).

Now Gallagher, a regular thorn in the side of corporate governance advocates with his criticism of proxy advisory firms, has co-written a paper suggesting that Harvard itself could be sued by either the SEC or investors for violating the SEC’s own anti-fraud provisions.Since 2012, SRP says 98 of America’s biggest listed firms have implemented the proposals after receiving an average of 80% shareholder support.

Gallagher and Stanford Law Professor Joseph Grundfest claim the SRP proposals violate the SEC’s Rule 14a-9 because they omitted research that is dubious about the benefits of annual director elections.

At the very least, they say, this means the SEC could allow companies to exclude more of these proposals in the future. They go on to suggest the SEC or even “private parties” (i.e. companies), could take legal action against Harvard.

Contacted by RI, Bebchuk said that if the SEC took it seriously, it would have a “major chilling effect” on shareholder proposals generally. Bebchuk also referred to an analysis of the Gallagher paper by Yale Law Professor Jonathan Macey – who concludes that the SRP proposals weren’t fraudulent or misleading – adding Gallagher’s stance is “perplexing” coming from a sitting SEC Commissioner.

Macey wrote: “Accusing an academic institution and a professor of committing fraud appears to me to be a strange way to criticize the SEC staff or to press for a change in enforcement practices, particularly when the accusation is being made by a sitting government official.” Gallagher is one of two Republican SEC Commissioners. The other three Commissioners, including SEC Chair Mary Jo White, are Democrats.