Set historically in the early 15th century, Act III of Henry V begins with Henry's exhortation to his soldiers to renew the attack upon the French town of Harfleur. The king urges his men “Once more unto the breach.”
My 1998 interview with renowned dealmaker Sandy Weill — conducted with a public announcement of the momentous merger of Citicorp and Travelers Group imminent — ends with his saying “Here we go again” (“Sandy Weill, Pragmatic Dreamer,” Spring 1998).
In the corporate governance world as of mid-August 2009, verily here we go again once more unto the breach — not to pursue a claim to the French crown or to forge a global financial supermarket, but to essay major modification of the structure and procedures of the proxy rules and of the election of directors.
The “we” here is the SEC. And the new-minted catchphrase, “Here we go again once more unto the breach” — jumping though it does o'er some 600 years — serves as a reminder that the Commission's presently proposed dramatic alteration to this terrain is the third time in the last six years that that agency has made such a foray.
In my column “Access Denied!” (Summer 2003), I analyzed the then-proposed SEC rule to permit shareholders to make nominations to the board and to have those nominees included in the company's proxy statement. Ultimately, it was not adopted.
In 2007's round two, the SEC went once more unto the breach by issuing for comment two mutually inconsistent Exchange Act releases, each proposing disparate approaches to board election procedures. (See “ ‘Access Denied!' Redux,” Fourth Quarter 2007.) The Commission did not thereafter adopt new rules. I predicted then that, were the SEC to come out for round three, that future bell would not ring until 2010.
I was off by only a few months. On May 20, the SEC proposed a new incarnation of change to the proxy rules, to be effective for the upcoming 2010 proxy season.
In SEC Chairman Mary Schapiro's words, that action “represents nearly seven years of debate about whether the federal proxy rules should support — or stand in the way of — shareholders exercising their fundamental right to nominate directors.”
Notice, first, how “support” is juxtaposed against “stand in the way of”; and, second, how the chairman melded the right to elect with a posited “fundamental right” to nominate. (A variation on this theme is analyzed in “ ‘Access Denied!' Redux.”)
Significantly, the Commission‘s May 20 press release explicitly tied the need for the proposed rules to the current economic crisis, board oversight of management, and “whether boards are appropriately focused on shareholder interests.” This seems quite an elastic view of cause-and-effect.
The proposed rules were formally issued on June 10; the comment period ended Aug. 17. If enacted, the rules in their present form would permit shareholders to have their own nominees included in the company's proxy materials if such shareholders met percentage ownership tests, have held their shares for at least one year, and were not seeking a change in control.
In 2003 and 2007, infirmities of the then-proposed rule changes were pointed out. Many of these same problems exist in the 2009 version (and in the proposed legislation). A principal one is that in this country we have never had federal corporate law; corporate law has always been the province of the states. Though the rules as formally proposed pay some obeisance to that notion, they would, if adopted, in effect bring more than just the nose of the federal camel into the state tent. The Schumer-Cantwell bill would, plainly, bring the animal entirely inside.
Another major problem is what some call the “one size fits all” approach and others the “check-list” or “box-ticking” mentality. Most experienced, competent directors know that governance structures that work for one company may not work well for another. Flexibility, not rigidity, should be the touchstone. (See, for example, my column “To Split or Not to Split,” Fourth Quarter 2004.) But the SEC's proposals and the new bill exalt the latter, not the former.
Even though the SEC's vote to propose the new rules was 3-2, the atmospheric and political tom-toms may be tapping out the message that on this go-round these changes will be promulgated, and that resistance to the juggernaut will likely not avail.
It may be worth remembering that in the second scene of Act III, King Henry threatens Harfleur's citizens with rape and murder unless the governor surrenders the town forthwith:
“The gates of mercy shall be all shut up … Will you yield, and this avoid? Or, guilty in defence, be thus destroyed?” â–
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