Ms. Schapiro, Tear Down That Wall!

By Eric Jackson
RealMoney Contributor
7/30/2010 10:00 AM EDT
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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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FinReg: Best and Worst Parts

By Eric Jackson07/21/10 - 05:59 AM EDT

Stock quotes in this article: FNM , FMCC , MCO , MHP

There has been a lot of complaining about the new Dodd-Frank financial regulation reform bill -- or FinReg -- by bloggers and politicians. However, most critics (and supporters) haven't read the 2,200+ pages of the bill. The reactions are driven more by pre-existing politics and shorthand biases for the general concept of governmental regulation.

If you think market actors are greedy and that the government keeps everyone honest, you support FinReg. If you think the government is made up of incompetent bureaucrats who get in the way of efficient markets and choice, then you think FinReg is terrible.

It's easy to be cynical about a big reform bill like this (and I am about a number of points in the bill). However, there is some good here. I believe that the politicians have used this bill as an opportunity to move a lot of little balls forward.

Critics trot out phrases like "this bill will do nothing to stop the next crisis." On one hand, they're right that it's hard for traders (let alone politicians) to predict the future. On the other hand, do they seriously think it's best to sit back after 2008 and do nothing?

In my view, here are the best parts of FinReg:

Derivatives OTC clearinghouses

Some estimate that the global market for derivatives is more than $700 trillion. Yet, a large part of it has operated between parties rather than through a clearinghouse. Now, it will and bank profits will go down. I think the system is better off and safer with this change.

Resolution authority

Former Treasury Secretary Paulson argued that he never had the "authority" to take over Lehman Brothers. Barney Frank has backed up Paulson's explanation, which is why he strongly supported the creation of this authority process to specifically deal with that one challenge.

Proxy access

This bill punted the idea to the SEC to define. Proxy access will determine whether shareholders can nominate directors to appear on the company's proxy statement for all shareholders to vote on at the annual meeting. This is good though. At the last minute, Chuck Schumer, Chris Dodd, and Evan Bayh (all Democrats) tried to water down proxy access by stating that shareholders should have to own 5% of the company's stock for over 3 years before being allowed to make a nomination -- thereby making 99% of shareholders ineligible. I'm grateful that Barney Frank pushed back.

A watered down version of Volcker Rule

I supported the Volcker Rule because I saw its intent was to lower the risk of financial institutions by getting them out of proprietary trading with assets that they would not have if not for the depositors' money sitting in "safe" bank accounts. Critics again howled that it wasn't part of the 2008 meltdown. This is one of those issues where I would ask the banks if they want to be short-term rich or long-term rich. Separating the trading from banking will allow all these banks to prosper in the long-term, even if they lose a few pennies in EPS over the next couple of quarters. It's discouraging that the bill version of this rule got watered down.

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