Ms. Schapiro, Tear Down That Wall!

By Eric Jackson
RealMoney Contributor
7/30/2010 10:00 AM EDT
Click here for more stories by Eric Jackson

Amid all the policy changes doing the rounds of Washington DC at the moment and their potential implications for stocks in the medium term, I thought I'd take a look at the issue of proxy access, which was recently passed as part of the Dodd-Frank financial-reform bill, but which has been left to the SEC to define and enact.

Basically, proxy access would allow shareholders in public companies to nominate directors to be included in the company's official proxy statement - the list of nominees to the board of directors, on which shareholders vote at the annual meeting.

Say, for example, Citigroup (C - commentary -Trade Now) has 12 directors this year. It will typically nominate the same 12 people to be put to the vote at next year's annual shareholder meeting. As there are no other options, the shareholders will usually re-elect the slate of people put in front of them by an overwhelming margin (90-95% is common).

In the current system, if shareholders are angry at the company, as they were, for example, in 2008 after Yahoo!'s (YHOO - commentary -Trade Now) board turned up its nose atMicrosoft's (MSFT - commentary - Trade Now) offer to buy the company, there are only two things they can do when it comes to re-electing directors: (1) vote against the re-election of the company's directors (individually or collectively), or (2) pay out of their own pockets to launch a full-blown proxy contest.

The problem with voting against directors is that it's largely symbolic. In the case of Yahoo!, 30-35% of shareholders voted against the re-election of former CEO Jerry Yang, Chairman Roy Bostock and others -- but nothing happened. Bostock is still Chairman, and the company's stock price is significantly below where it was at the 2008 shareholders' meeting (and a universe away from the Microsoft buyout offer).

The problem with a proxy contest is that it's very expensive to launch. Effectively, by running such a contest, you are coming up with your own alternative list of nominees to send to all shareholders (in addition to the official company proxy they receive). Then, you have to try to convince all those shareholders to vote for your proxy rather than the company's. After mailing costs, lawyer and proxy-solicitor fees, you are looking at a minimum of $1 million, probably much more if you're going to go after a Yahoo!- or Citi-sized company. Therefore, this option is really only attractive to rich, activist-minded shareholders, such as Carl Icahn, who decided to go after Yahoo! in 2008 and later struck a deal with the company to get a few seats on the board.

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