Democrats and Republicans faced off Wednesday in a congressional debate over whether shareholders should have an easier time nominating directors to corporate boards. Republicans sided with the people who run the companies; Democrats with the people who own them.
The debate is over "proxy access" -- in short, a proposal that would allow large shareholders to use a company's process to nominate directors to the board, rather than the current method which calls for shareholders to mount these campaigns on their own, at their own
expense. The cost, many argue, is prohibitively high.
An amendment to the Investor Protection Act of 2009 introduced by Rep. Maxine Waters (D-Calif.) and supported during the debate by House Financial Services Committee Chairman Barney Frank (D-Mass.) would affirm federal regulators' ability to adopt rules strengthening
shareholders' ability to nominate directors.
Republican Reps. Michael Castle (Del.), John Campbell (Calif.) and Spencer Bachus (Ala.) opposed the measure.
The Securities and Exchange Commission proposed changing the current rules in June to "remove impediments to the exercise of shareholders' rights." The agency received more than 500 comments. The final rule has not been released.
Advocates, which include large institutional investors like pension funds, hedge funds and unions, support the proposal because it would make it easier for them to nominate directors opposed to management, thus giving shareholders a greater say in how a public company is run. Supporters include the AFL-CIO, Sen. Carl Levin (D-Mich.), the California Public Employees' Retirement System (the country's largest state public pension system with about $190 billion under management), and a bipartisan group of eighty law and economics professors from the country's top universities.
Large corporations -- and the high-powered law firms they use -- oppose the measure, arguing that, among other things, the proposal exceeds the SEC's authority, would be too costly for companies, would impair boards' functioning, and that there's no compelling need to change the system. Critics include the U.S. Chamber of Commerce, the American Bankers Association, Intel, Microsoft, Pfizer, and Verizon.
The Waters amendment, if enacted into law, would give the SEC cover if it adopts the pro-shareholder rules and is faced with what many expect to be a flurry of lawsuits.
Historically, the power to regulate such matters -- like shareholders' voting rights -- lay with the states. Opponents of the measure say the SEC is trampling on states' rights.
The sudden advocacy of states' rights by the same players who recently argued against the rights of states to exceed federal banking restrictions struck Frank as amusing.
After Castle voiced his "very strong opposition" to the Waters amendment, Frank said the following:
"First, I appreciate what the gentleman had to say in terms of deferring to states...Where was he when we were talking about preemption with banks and consumer protection?"
Frank suggested that Castle's thinking apparently went something like this: "When it comes to consumers, that's gotta be preempted. But when it comes to protecting companies and boards of directors, we have to defer."
A final roll call vote on the measure is expected next week.