The SEC’s Sop to Unions

The Securities and Exchange Commission is busier than ever in the wake of the financial crisis and the most significant financial legislative changes since the 1930s. So it has been more than a little puzzling to watch SEC Chairman Mary Schapiro stake out another partisan position on a peripheral issue called “access to the proxy.” On Wednesday this rule was approved: Shareholders will now be able to place their own nominees for corporate boards directly on the company’s proxy card, at company expense.

Ms. Schapiro’s goal? To assuage politically powerful trade-union activists, self-nominated shareholder-rights advocates, trial lawyers, and the White House.

Unions and special-interest groups successfully lobbied Congress to include a provision in the recent Dodd-Frank Act to empower the SEC to make rules regarding proxy access. With the so-called card-check bill dead in Congress and an election looming in November, the White House needed another carrot for these groups. It found an opportunity in proxy access and a willing collaborator in the SEC.

Ms. Schapiro got the commissioners, 3-2, to approve the rule, which will allow some shareholders to override the normal director-nomination process.

A fundamental principle of state corporation laws is that all shareholders holding the same class of securities have the same rights. The new rule will discriminate among shareholders, since the SEC would increase the clout of special-interest groups at the expense of the vast majority of shareholders.

On its face, increased proxy access seems to embody a traditional democratic value: Give shareholders a choice, and they can decide whom they want as their directors. But average shareholders have not been clamoring for this special privilege because they would never have the access that is envisioned.

That is because the SEC decided who is in and who is out. In a cynical game of picking numbers, the SEC considered 5%, 3%, 2% and 1% of outstanding shares and various holding periods as thresholds before which shareholders can use the new rule. The winner, after much behind-the-scenes maneuvering with favored parties: 3% and three years. The idea was to find the magic number where “good” shareholder groups (like state pension funds) are in, but “bad” groups (politically incorrect shareholders, like hedge funds) are out.

It’s no coincidence that only unions and cause-driven, minority shareholders want this coveted access. They would use it to advance their own labor, social and environmental agendas instead of the corporation’s goal of maximizing long-term shareholder wealth. The rule will give them pressure points with which to hold companies hostage until their pet issues are addressed. Many corporate managements and boards will acquiesce to avoid a contested director election.

Transparency and fairness will suffer because the rule invites abuse. Institutional representatives admitted—at a public 2007 SEC roundtable on the proxy process—that they already use the machinery of shareholder proposals as leverage to accomplish private objectives behind closed doors. In other words, they threaten to propose a proxy measure and see what the company will give up to keep it off the proxy ballot. The company may even adopt some or all of the proposal, even though the measure would likely fail in a shareholder vote. This rule adds another powerful tool to that arsenal of threats.

Many are praising this development as a gift for shareholders. In truth it’s a Trojan Horse.

Mr. Atkins is a former SEC commissioner and a partner at Patomak Partners LLC.