Wednesday, September 1, 2010

Proxy Access: Brace Yourself

Approved by the SEC on Aug. 25, the proxy access rule, years on the drawing board, is now with us. Thus begins a new era in shareholder-board relations, and, perhaps, board composition.

We will have to wait and see if the dire predictions come true of those who fear that this rule will be a tool for unions and other politically driven and issues-oriented activists. Often the worst projections fail to materialize.

But Corporate America might well brace itself. Proxy access's impact could be huge.

Why do I suggest that? I am mindful of something that one of the preeminent shareholder activists said to me about the one thing that truly leads to change in board behavior and, consequently, in company performance: The addition of new members to a board.

This was a fundamental lesson learned by Nell Minow (pictured). She shared it with me when I interviewed her in 2001 for an "Oral History of Corporate Governance"-themed 25th anniversary edition of Directors & Boards. Here is what she had to say, and it is worth paying close attention to in light of proxy access's passage:

"If there is anything that I've learned in all that I've done, it's that what really matters is who is on the board. I saw that with Sears. After Bob Monks left ISS in 1990, I rejoined him a year later, in time for his second proxy fight with Sears. In settling the shareholder lawsuit, the company agreed to add two new independent directors — thinking, I imagine, that they would be two more patsies. It was the presence of those additional directors that I believe made more difference in what Sears did to restructure itself to unlock shareholder value than anything else that we could have done. I was to learn that lesson over and over again. The only thing that ever brought about change was adding new directors to the board."

That is a powerful bit of learning — for CEOs, boards, and shareholders. The prudent and foresightful will take this under advisement as the era of proxy access gets underway.