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Proxy Access Important for Silicon Valley Investors

If you ask investors, one of the most interesting elements of the financial-reform law being worked out in Congress is “proxy access.”

Proxy access means the SEC would require companies to give large investors greater ability to seek votes from other investors on key changes they want from the company — such as new board members, new ways of compensating the CEO, or new corporate “green” policies.

Two Santa Clara University professors believe the proposed new rules could have a significant impact in Silicon Valley, where company CEOs are frequently accused of being overly cozy with their boards of directors and ignoring the will of their shareholder owners.

Under the proposed law, investors who own a certain amount of the company — say five percent or more — would be allowed to mail their proposals to their fellow shareholders by piggybacking on mailings sent out by the company — known as “proxies.” They would ask their fellow shareholders to vote for the changes.

Stephen Diamond, a corporate- and labor-law professor at SCU, calls the proposed change “a more balanced approach to corporate governance.”

He says Silicon Valley companies have historically relied on experienced technology insiders or friendly politicians to serve on their boards. Proxy access “could force tech companies to open up the board room to a wider array of shareholders,” he says.

Finance professor Atulya Sarin also says such new rules will be good for businesses, “democratizing” them and putting shareholders more in the driver’s seat as the owners they are. He said once the new rules are in place, investors will likely begin by asking for compensation or audit committees to be more independent from the CEO — perhaps resulting in lower-paid executives or more-rigorous accounting oversight. Even if investors don’t avail themselves of their new rights, he adds, the threat of proxy action could spur changes at companies.

Prof. Sarin believes that very large companies ought to be required to give proxy access to all shareholders who own at least one-half or one percent of the company — not the five percent threshold that has been discussed. Smaller limits of 5% might make sense for smaller companies, he said.

“Very few investors own five percent of the largest companies,” said Sarin. “And those that do already have considerable influence at those companies.”

Similarly, says Diamond, a second important reform measure being proposed is “say on pay” which would mandate that companies institute a non-binding vote on compensation packages given by boards to top executives. Efforts at companies like Apple to institute say on pay through a shareholder resolution have failed to win sufficient votes in the past. With the new legislation Apple would be required to let shareholder vote Yay or Nay on pay to top executives like Steve Jobs.

Prof. Diamond contact information: sdiamond@scu.edu

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