I thought the following informative and rather pointed email from Yale Law Professor Roberta Romano would be of interest to many readers (published with her permission):
I thought that I would pass along my reaction to a New York Times article by Gretchen Morgenson in Sunday’s business section….. The article in question flunks Corporate Governance 101. Morgenson cites a study by the IRRC as supporting the SEC’s proxy access initiative (a regulation proposed by the SEC by a 3:2 vote last week that has been promoted by union funds for quite some time). According to Morgenson, the study found a positive impact from dissidents elected in proxy fights. That is not news; it is well-established in the empirical literature that proxy fights increase value. Indeed, firms experience positive price effects from proxy fights even when dissidents lose.
But those data have no relevance to the proxy access proposal. Proxy fights require challengers to spend their own resources to get on the ballot and solicit votes; proxy access nominations require no such expenditures. In fact, the overwhelming empirical evidence on shareholder proposals, which are also for free and the model for proxy access, indicates that they do not add value. This should not be a surprise: the incentive for getting things right are very different when something is for free. Having to put your money where your mouth is, so to speak, means that you have to have a good grasp on how to resolve perceived problems of a firm, and select board nominees who will be effective. You also need to have a nontrivial stake in a company to engage in such activity, for the cost-benefit to work, and thus, also not surprisingly, the IRRC study Morgenson cites finds the performance impact was higher the greater the dissidents’ stake. The proposed proxy access requires no expenditures, and trivial holdings (letting shareholders aggregate their holdings to reach specified levels, depending on firm size). Understanding the difference in incentives provided by the two processes is fundamental to understanding corporate governance; only someone woefully ignorant or intellectually dishonest would regard that data as relevant to the SEC’s proposal.
There is nothing wrong with a journalist expressing a point of view, as Morgenson does, with respect to the efficacy of the SEC’s proxy access proposal. But it is troubling when a prominent journalist does not consider a requisite part of her job to be seeking out opposing views (i.e., critics of proxy access), if not to provide balance to a piece, to ensure that she has not been misinformed by a like-minded source, and writes something, such as Sunday’s column, which is an embarrassment.