So, proxy access is “dead”, at least in some forms, and by some accounts just for the moment. Let’s perform a little post-mortem, shall we? The autopsy reveals that the regulations implementing proxy access died due to an unsatisfactory accounting of the costs and benefits of complying with the proposed rules.

By costs and benefits, of course we refer to the benefits to investors, and the costs to corporations. A thoughtful analysis suggests there are definitive material benefits to investors, in contrast to what the DC Appellate Court found.

As for costs? A similar look at those indicates just what sort of BS that the petitioners that sued the SEC (The Business Roundtable and the US Chamber of Commerce) managed to put over on the Court. Most of the supposed costs are not only supposed, but are actually discretionary – companies spend money on proxy contests because they choose to, not because regulations require them to.

What is this Cost/Benefit Analysis?

Federal agencies must justify regulations using cost/benefit analysis. They need to show the benefits of having a given regulation outweighs the costs of complying with it.

In other settings, regulatory compliance could involve real mandatory costs: monitoring pollution, reporting employment statistics, or adding whistleblower phone numbers. In the proxy access setting, it’s not exactly clear what the mandatory costs involve (more below).

The SEC went to great lengths to justify their proposed proxy access rules. They cited available studies of both the benefits to investors, and the costs of complying with the regulations. The petitioners challenged the rules on that very basis; that the SEC failed to account properly for the costs and benefits. As noted before, the Court sided with petitioners.

How about those benefits?

Any activist investor can recite the benefits. Numerous studies, many of them available here, show that activist investing leads to superior equity returns. A few studies show that proxy contests contribute to these returns.

The Court disagreed with this analysis, calling the SEC’s evidence “unpersuasive”. Instead, they relied on some rather outdated studies that showed that proxy contests diminish equity returns. Steve Davidoff (the Deal Professor at the NYT DealBook) critiques this aspect of the Court’s analysis quite well.

Another benefit that accrues to activist investors: they avoid the considerable expense of soliciting proxies themselves.

So, what of costs?

Here it gets a little more complicated. Corporations appear to bear a three costs with proxy access:

1. ❖Direct cost of including shareholder nominees in proxy materials.
   

2. ❖Increased frequency of proxy contests, due to the relative ease with which shareholders can solicit support for their nominees.
   

3. ❖Cost of these more frequent proxy contests, in terms of direct costs, and management and BoD time and energy.
   

The direct cost of including shareholder nominees is of course negligible. Adding biographies to proxy materials and names to proxy cards, which the company already produces, will add perhaps a few cents per shareholder.

It stands to reason that proxy contests will become more frequent (otherwise, what’s the point?) but by how much? The Court concludes that the SEC did not offer conclusive data. The available data suggests that the likelihood of a company needing to respond to a proxy contest increases from absurdly low to merely very low.

The cost of proxy contests, then, becomes the final and most interesting element. The SEC acknowledged that at large companies, proxy contests cost the company $4-14 million, and $800,000-$3 million at smaller companies. The Court found that the SEC “reasonably explained why those costs “may prove less than these estimates”.”

The Nature of Corporate Proxy Costs

How do companies come to spend that kind of money? Both the SEC and its opponents answer that question.  The SEC recognized “company boards may be motivated by the issues at stake to expend significant resources to challenge shareholder director nominees.” Petitioners assert that the SEC “failed to appreciate the intensity with which issuers would oppose nominees… [and that] directors would conclude their fiduciary duties required them to support their own nominees.”

The proposed regulations don’t mandate corporations do this. Instead, only “the issues at stake” or “fiduciary duties” prompt this expenditure. At their discretion, management and boards spend all that money on proxy contests. Of course, they don’t spend their own money, either, but rather use company money, which really belongs to investors.

And why do they do this? What issues are at stake, or what fiduciary duty do they seek to protect? Of course, they only want to defend their turf and entrench themselves. So, the SEC proxy access rules won’t require corporations to do this. Corporations choose to.