The current financial crisis has rightfully gained the attention of legislators and regulators who believe that a crisis is an opportunity for change that is not to be wasted. However, in my opinion a rush to effect change could have unintended consequences when it comes to changes to the proxy rules currently proposed by the Securities and Exchange Commission (SEC).

In May 2009, the SEC voted to propose changes to the proxy rules that would, if adopted, significantly alter the manner in which corporate directors are nominated and elected. While these proposed changes have been an area of contentious debate for several decades, SEC Chairman Mary Shapiro recently indicated that she anticipates the SEC will finally take action on this matter in early 2010. This rule proposal is an effort by the SEC to remove impediments from the proxy rules to increase shareholders’ ability to hold boards accountable for their decisions by exercising their fundamental right to nominate and elect directors. The objective behind the proposed changes is good, but some risks are present if these changes are implemented as proposed.

The rule proposal contains a provision for the adoption of a new Securities Exchange Act of 1934 (Exchange Act) Rule 14a-11 that would provide shareholders of public companies, under certain circumstances, with the ability to nominate directors via the company’s proxy materials instead of via the current process, which requires shareholders to mount a costly proxy contest and prepare their own proxy materials. Rule 14a-11, as proposed, is a “one-size-fits-all” approach or prescriptive proxy access rule that would apply to all public companies. In the same rule proposal release, the SEC has also proposed to amend the existing election exclusion in Exchange Act Rule 14a-8(i)(8) in order to permit shareholders to submit proxy access related proposals for inclusion in their companies’ proxy statements.

I believe these proposed changes to the federal proxy rules need more consideration because of potential adverse effects, including disproportionately empowering certain groups of shareholders with views that may not reflect the interests of a majority of all shareholders. It also remains uncertain as to how the inability of brokers, as of Jan. 1, 2010, to vote uninstructed “street name” shares in uncontested elections of directors will impact the implementation of these proposed changes to the federal proxy rules. In fact, there is ongoing debate as to whether the SEC even has the authority to adopt proposed Rule 14a-11.

These are just a few of the reasons why it is an inopportune time for the adoption of a prescriptive proxy access rule and an inadvisable rush to effect change, especially while a less controversial option exists to help facilitate the desired objective. For example, many support only amending Rule 14a-8(i)(8) to permit proxy access shareholder proposals without taking any action to adopt a “one-size-fits-all” approach. This approach is desirable because it would remove existing impediments in the proxy rules and also facilitate private ordering, which is the ability of the shareholders of each individual company to determine whether a proxy access regime is desirable and, if so, its form. Private ordering is preferable to a mandated “one-size-fits-all” proxy access regime because of the flexibility of its application and because its application to each company will be determined by its shareholders. This approach also would enable further analysis of whether the objective of holding boards more accountable for their decisions has been achieved and possibly negate any perceived necessity to adopt a potentially conflict-ridden prescriptive proxy access rule.

In my opinion, arguments for a prescriptive proxy access rule reflect a desire to implement change in
a vacuum without pausing to carefully examine the unintended byproducts of the “one-size-fits-all” approach. Change can be good, but a rush to change could backfire.

Chad J. Wiener is an associate at Quarles & Brady LLP, Milwaukee, in the Corporate Services Practice Group.