Securities & Exchange Commission Chairman Christopher Cox faces perhaps the single most important decision of his tenure—whether to give shareholder groups access to companies' ballots so they can nominate candidates for boards of directors. Many chief executive officers and directors say that would cripple their decision-making process. The American Federation of State, County & Municipal Employees (AFSCME) sued American International Group (AIG) for the right to nominate directors. AIG led it into court. It was appealed, and the court ordered the SEC to clarify the matter.
In a highly unusual move, Cox has proposed rules that both support and oppose shareholder access to the proxy ballot. A public comment period ended on Oct. 2.
John Wilcox, senior vice-president and head of corporate governance for TIAA-CREF, the $428 billion pension fund for teachers, argues that shareholders should not be in the business of choosing directors and that the SEC should refrain from taking any action on the highly contentious issue. Here are edited excerpts from a conversation:
What is everyone so worried about?All of them are hypothesizing that there will be some sort of draconian arrangement in which shareholders will be able to get special interest candidates nominated and elected to boards, or else labor representatives or others who will not adequately represent all shareholders. They may not have the knowledge or credentials to serve on the board of a particular corporation. This hypothesis is way out there. Aside from the AFSCME proposal, there have been very few shareholder proposals on access and those have been quite self-limiting.
What does TIAA-CREF think?We have recommended to the Commission that shareholder-access proposals, particularly nonbinding ones, are a good way to try out different approaches. Shareholder proponents could think about different ways shareholder access might work. They can try out different limits on the amount of shares a nominator would have to collect, whether it's 3% or 5%.
But a much more fundamental question is whether state law or federal law ought to determine the processes for nomination and elections of directors. It's very surprising that commentators on the corporate side have not addressed that question. There is an extreme overreaction on the part of the corporate community to these supposed threats that might arise from access when, in fact, we're very far away from having any actual proposal on how access would work.
What are corporate leaders worried about?They are worried about a power shift to shareholders in which boards of directors will suddenly become dominated by special interest groups. I don't see this happening. No shareholder I know, and I include in that labor funds, public pension funds, and even hedge funds, is interested in having boards made up of special interest representatives who can't get along. Most investors, certainly TIAA-CREF, are very deferential to the expertise of the various boards in dealing with the problems that their companies face. We want boards to include the best-qualified people. We don't want to have boards be a setting for disputes among special interest groups or a battleground of shareholders vs. management. That is unproductive.
If shareholders actually own the company, what's wrong with the idea that shareholders should nominate directors?That's not really the question. The question is how that process should work. We've never had a system in this country that enabled shareholders to directly impose a nominee of their own choosing onto the management proxy. That's what access is all about. Access raises a number of very complicated questions, and those questions have not been answered. Those questions should be addressed in a calm environment.
Do you have a proposed solution?We are not sponsoring any form of access at this point.
What we want is for the shareholder-proposal process to operate freely, enabling us to look at different types of access that might be proposed. This would allow for a degree of creativity on the part of proponents, to think about how access might work. Our position with respect to the SEC proposals is that we think state law ought to remain the controlling factor. We don't think the SEC should be creating any rule.
If state law remains supreme, what would be the practical effect of that?It would mean each state could decide through legislation or its courts whether a shareholder-access proposal is permissible under their state law and what sort of access would be appropriate under state law. You might have different solutions in different states. Under Delaware law, it seems relatively clear that shareholders would have the right to submit resolutions to change the procedures by which directors are elected.
You don't think TIAA-CREF should be in the business of choosing specific directors even when you may own billions of dollars worth of shares?We've never said we want to be in the business of director search. We are generally supportive of the nominating committee's efforts to find the right candidates—provided they explain to us what they are doing and why. We don't want to substitute our judgment for that of the board.
That's why I take issue with the commentary that this access issue is a battle between boards and shareholders for control of the company. The struggle is really between management and shareholders, and it's a struggle for the soul of the board. We want director-centric boards. We want strong boards with independent directors who are knowledgeable and skilled and capable of overseeing the company's strategy and representing the interests of all shareholders.
What's the worst-case scenario?If there were special interest candidates who succeeded in getting nominated, they would not get elected. We are not going to vote for special interest candidates, and most shareholders are not going to vote for candidates who come on with an agenda that's focused exclusively on a particular group that they represent.
Where do you think Chris Cox's soul is on this issue?I have no idea. It's pretty unusual for a SEC chairman to vote in favor of two contradictory proposals. It must have been done to get a broader public debate on the issues to help the commission to make its decision.