“And the Commission must decide its role in corporate governance. Can it be content with simply amplifying disclosure of conflicts, or must it seek a broader mandate to move corporations to higher levels of sensitivity and concern for these matters. The present effort of the New York Stock Exchange, an effort I am associated with, to deal with the increasing number of companies that are willing to forfeit their Exchange listing for the protections A and B stock configurations give them against unwanted offers raises forcibly the question whether the Commission can rightly step aside and witness a new ‘race to the bottom.’”
In the late 1980s and early 1990s, in response to the takeover wave and the rise of institutional investors, the SEC became more involved in governance issues, usually coming down on the side of shareholders. This approach was evident in the SEC’s response to the New York Stock Exchange’s attempt to end its one share, one vote policy, and in its efforts at proxy and executive compensation reform.
Private ordering remained alive and well in corporate governance, as states kept a light touch and the SEC generally stayed out of battles for corporate control. But the SEC’s right to regulate the exchanges, and thus listing standards regarding voting rights, was clear. One approach to fighting takeover attempts was to create multiple voting rights plans, including provisions for shares with augmented powers and privileges. Such plans, however, diminished the value of single-vote shares, those most often held by small investors.
The issue gained national prominence after the NYSE, facing competition for listings from exchanges that permitted multiple classes of stock and with listed companies eager to defend themselves from takeovers, tried to reverse its tradition of requiring one vote per share for listed companies. The move elicited an immediate backlash. T. Boone Pickens railed, “There’s only one group in town celebrating this one—the entrenched managers of large corporations.”33 Congress asked the SEC to prevent the NYSE from changing its standards. The SEC held hearings and issued Rule 19c-4, forbidding exchanges from listing the shares of companies that adopted disparate voting rights plans. 34 Although the rule was struck down after a legal challenge by the Business Roundtable, it was functionally adopted by most exchanges and the integrity of voting shares was largely maintained.
More significant to shareholders was the SEC’s change of heart on proxy rules. Since the late 1970s, the SEC had debated various reforms to the proxy process governing how shareholders submitted proposals to directors and communicated with each other. In the early 1980s, a generally business-friendly SEC ruled that shareholders had to own $1,000 worth of stock to put forth a proposal, limited each to one proposal per year, and gave companies greater discretion in excluding proposals.
By the latter part of the decade, takeover defenses and state takeover laws had encouraged management to dig in its heels, even as institutional investors, encouraged by ERISA and the Avon letter, clamored for more say in the proxy process. Proxy fights supplanted takeovers as the preferred means of gaining control. In 1991, SEC Chairman Richard Breeden expressed support for a shareholder bill of rights, and the SEC considered proposals that allowed shareholders to vote on management tenure and compensation. In 1992, the SEC adopted rules governing the disclosure of executive compensation, in part to head off legislation on the subject.35 These rules included promises to allow shareholders to learn a company’s rationale for executive pay, giving them the right to non-binding, advisory votes on that compensation. If it did not provide direct power, the measure allowed shareholders more of a voice in company affairs.36
The SEC also eased rules governing shareholder communications. Previously, if more than ten shareholders communicated, they were required to file with the SEC and pay the associated proxy costs. Changes to the rules expanded the zone of unregulated soliciting significantly for many shareholders who were not seeking proxy authority. Although battles still raged over the extent to which companies could exclude shareholder proposals, the reforms of 1992 marked a major step forward for shareholders and helped ensure that further changes in the boardroom would likely be the result of the proxy system.37
By the early 1990s, corporate governance was now no longer the esoteric issue that it had been a generation earlier. The effect of the takeover wave and the impact of institutional investors was evidence of a new consensus on the subject. In 1991, Martin Lipton, one of the corporate world’s staunchest defenders, co-authored with academic Jay Lorsch “A Modest Proposal on Corporate Governance,” which called for smaller boards dominated by independent directors, and a lead director – distinct from the CEO - to run more frequent board meetings. For the first time, corporate America at large recognized that improving governance practices was no longer optional. Shareholders and management had struck a balance, at least for a time.38
(34) May 2007 Stephen M. Bainbridge, “The Scope of the SEC’s Authority over Shareholder Voting Rights”.
(35) February 14, 1992 The Wall Street Journal, “Shareholder Groups Cheer SEC’s Moves on Disclosure of Executive Compensation.”
(36) January 4, 1993 Reply to U.S. Senator Bob Kerrey from Mary Beach, SEC on executive compensation disclosure; March 3, 1992 Reply to U.S. Representative John Boehner from Mary Beach, SEC on proxy proposals.
(37) March 3, 1992 Reply to U.S. Representative John Boehner from Mary Beach on proxy proposals.
