Professors Push Changes to SEC Reform

A group of Harvard professors have petitioned the Securities and Exchange Commission to alter its current proposal to give shareholders the power to nominate members of company boards, a change they say would increase companies’ exposure to volatile investor sentiment.

The professors—a group of Law School and Business School experts on corporate governance—argue in a letter sent to the SEC in mid-August that any proposal to increase shareholders’ influence on board member selection needs to be more restrictive. They wrote that speculators and raiders—the kind epitomized by “Wall Street’s” Gordon Gekko—have little long-term interest in a given company and may sacrifice long-term viability for short-term profits.

The reform’s proponents place some of the blame for the financial crisis on insufficient shareholder oversight. They argue that opening boards to stockholder influence is necessary to increase accountability to those who own shares in the company.

In their letter, the Harvard professors endorse the intent of the proposed reform but push for revisions to the specifics of the proposal. Instead of the current reform’s rule that shareholders be able to nominate directors with as little as a one percent stake in the company, they proposed the bar to be eligible be raised to five to 10 percent ownership in the company for at least one year. Currently, the proposal requires only a one percent stake to nominate.

Companies have long resisted stockholder influence over corporate board membership, arguing that most investors seek short-term gain and have little interest in preserving the company’s long-term profitability, said signatory Joseph L. Bower ’59, a professor at the Business School.

The reform’s backers say empowering shareholders could help prevent another financial crisis, but according to Jay W. Lorsch, a Business School professor and signatory to the letter, the new reforms represent a continued effort by institutional investors to gain power and influence over the companies they invest in—a movement that predates the market crash.

“Shareholder democracy doesn’t make a lot of sense,” said Bower. “The notion that the shareholder is a citizen with a stake and an understanding of the issues in a company is a bit theoretical or empty in my view.”

The SEC’s proposal, a cornerstone of Chairwoman Mary L. Schapiro’s financial reform agenda, has aligned in opposition a powerful constellation of some this nation’s largest and most prestigious law firms and Fortune 500 companies, including Wachtell, Lipton, Rosen & Katz, where Law School professor and principal author of the letter John C. Coates once worked.

According to a Washington D.C. lawyer with expertise in corporate governance who declined to be named to protect his client relationships, any potential reforms are sure to face a concerted challenge in court over whether the SEC has power to regulate in this field.

And among these academics who ostensibly support the idea behind the proposal, skepticism remains.

“I don’t have much confidence given the way American capital markets function that they can effectively govern companies,” said Lorsch.

—Staff writer Elias J. Groll can be reached at egroll@fas.harvard.edu