The SEC's New Board Nomination Rules

Yesterday's lead staff editorial in the Wall Street Journal trumpeted the victory of Saul Alinsky's tactics via the SEC's new, easier rules for union pension funds to force companies to place their board nominees on proxy ballots.

Without going into laborious (pun intended) detail, left-leaning SEC chief Mary Schapiro rammed through criteria owning only 3% of a company's equity for only 3 years in order to nominate up to 25% of a board's membership. The key difference is that, in the past, union pension funds would have had to pay for campaigns and mailings to achieve the same effect. Alinsky was on record as calling the 1960s proxy campaign against Kodak a watershed event.

However, on the same day as the editorial appeared, there was a discussion among some guests on CNBC involving the near-total extinction of institutional buy-and-hold equity strategies.

For better or worse, almost no professional money managers really sit on equity assets for years anymore. It's simply too risky in today's equity market environment.

That would imply that anyone taking advantage of this new SEC ruling is a rather backward, antiquated equity manager.

The Journal editorial alleges that this rule would make companies vulnerable to union coercion to do things like resign membership in the Chamber of Commerce, or explicitly back a government policy or favored administration legislation, regardless of the action's benefit for the company.

First, I think the editorial is a bit over the top on the coercion angle. I think it's legitimate to expect such coercion, but I think it's wrong to believe that companies will simply fold on the issues, or that the union pension nominees will automatically be elected, or, being elected, will be able to force the board and company to do their bidding.

But the SEC's rule, in the context of today's equity management approaches, seems, itself, antiquated.

If very few managers, perhaps even including those managing money for union pension funds, hold that much equity for that long, is the rule even going to be able to be invoked very often?

I've argued in prior posts, found under the "shareholder democracy" and "corporate governance" labels, that the former term is a myth, as currently used.

The only "shareholder democracy" in which I'm interested is one that assures me instant, liquid markets for buying or selling equities. My equity strategy doesn't include corporate actions or board composition in its factors for selections. It actually prohibits me from owning an equity for as long as 3 years in any significant concentration.

So, if most institutional investors hold for significantly less than 3 years, constantly seeking the best potential returns in the equity markets, is the SEC's new proxy rule going to affect those investors and their behaviors?

Supposing that the Journal editorial's implication is correct, and those companies in the crosshairs of union pension funds suffer worse performance and returns, then investors will have already moved out of those companies' equities before the real damage occurs. And, if this happened, in a recurring fashion, won't the union pension fund board nominees begin to be defeated, as their elections are publicly shown to damage shareholder wealth?

In fact, the reality of shorter institutional holding periods, and greater turnover of holdings, pretty much makes slower-moving SEC rules moot, don't they? Investors are buying and selling on a much shorter cycle than the SEC's proxy rules take to change boards.

Maybe this is much ado about nothing.