Alinsky Wins at the SEC

With another of her patented 3-2 party-line votes, Ms. Schapiro has given the big pension funds a power they have never had—the ability to force their preferred candidates for board directors on the proxy ballots that public companies must send to shareholders.

Shareholders who have owned 3% of a company for at least three years will now be able to nominate candidates who would represent up to 25% of a company’s board. Until now, pension funds and other dissident shareholders had to pay to mount their own campaigns and mail their own notices to shareholders. But the pension funds rarely did so because they would have had to justify spending their beneficiaries’ assets with evidence that their activism was actually increasing the value of the investment. Not likely.

Sold in the name of “shareholder democracy,” this new rule will mainly be used not by mom and pop investors, but by union funds and other politically motivated organizations seeking to force mom and pop to support causes they otherwise would not.

Associated PressMary Schapiro

We can be confident making this prediction because we’re told Ms. Schapiro might have picked up at least one GOP commission vote had she raised the shareholder threshold to 5%. But the unions think 3% is the sweet spot to maximize their leverage without having to commit too much investment cash to any one company, and Ms. Schapiro obliged by ramming the 3% threshold through.

The much better way to discipline self-serving boards and incompetent management would be to make it easier to launch hostile takeovers. Yet another failing of the new Dodd-Frank Act is that it did not include a repeal of the 1968 Williams Act, which added all kinds of SEC reporting requirements on investors making tender offers, and even on investors acquiring large blocks of shares who have not even attempted to take control. Ms. Schapiro’s record is devoid of any effort to liberalize the rules for corporate control.

Instead, Chairman Schapiro’s new proxy rule is a weapon to extract political concessions unknowingly underwritten by shareholders. Activist groups and union-led pension funds will come knocking on a corporation’s door threatening to run opposition candidates if, for example, the firm doesn’t endorse ObamaCare, or won’t stop supporting the U.S. Chamber of Commerce.

In order to avoid a proxy fight and get back to business, most CEOs and boards will in practice write checks or bow to this or that political demand, and these negotiations will not be disclosed to shareholders. Smaller public companies have three years until they are hit by the new rule, but the largest companies will face the activists right away.

Ms. Schapiro has signaled from the start of her tenure that her two main constituencies are Congress and unions, not shareholders. She quickly appointed Kayla Gillan, a former general counsel of Calpers, the pension fund for California state workers, as senior adviser. Then Ms. Schapiro brought in Richard Ferlauto—the former pension director at AFSCME, the union representing state and local government employees nationwide—to develop policy in the SEC’s investor advocacy office. AFSCME is the largest political campaign contributor in the current election cycle among public sector unions, with 99% of its money going to Democrats.

Former SEC general counsel Brian Cartwright, now at Latham & Watkins, notes that the new SEC rule is right out of the famous playbook of community activists, Saul Alinsky’s “Rules for Radicals.” He quotes Alinksy reflecting that until a campaign against Eastman Kodak in the 1960s, ‘[n]o one had ever organized a campaign to use proxies for social and political purposes.'”

Mr. Cartwright adds that, “Alinsky was so excited by his new idea that he trumpeted the proxy tactic as ‘one of the single most important breakthroughs in the revolutions of our times.'” Coming from a different point of view, the late, great Peter Drucker once warned in a famous essay about “Pension-Fund Socialism.”

Says Mr. Cartwright, “At a moment when our economy is tottering, millions are unemployed with little hope of relief, and American economic dominance is challenged by aggressive new competitors in Asia, a bare party-line majority of the SEC has embarked on a grand experiment in politicizing the leadership of our businesses.”