Tim Smith, director of the Environmental, Social and Governance (ESG) Group at Walden Asset Management, expects proxy access will be used very sparsely because of the tough nomination and election hurdles discussed earlier. It's also just one tool in a big tool chest, he notes.
Still, Smith strongly believes that having proxy access will make companies more alert and responsive to shareholders. Average investors should also benefit as much as institutional ones since proxy access makes boards more accountable to shareholders in general, he says.
"The downside of proxy access is quite minimal; it pales in comparison to the benefits," says Smith. He disagrees with the U.S. Chamber of Commerce, which calls the rule "a giant step backwards for investors" and with the Business Roundtable sued the SEC on September 29 to overturn it. "The Chamber of Commerce makes it sound like it's a nail in the coffin of capitalism, but within a year or two it'll be seen as a reasonable approach," he says.
The Social Investment Forum, which has advocated a federal proxy access rule with its members since its 1981 founding, takes issue with the U.S. Chamber of Commerce and Business Roundtable's challenge. "The trade associations paint a bleak picture of special-interest groups purchasing a few shares and whimsically nominating poorly qualified candidates in the name of gaining leverage over companies for aims out of step with the majority of shareholders' interests. This could not be further from the truth," it says.
"The SEC's final rule takes a thoughtful, balanced approach to ensure that proxy access is aligned with long-term shareholder interests and places a much-needed check on corporate management, while keeping those with short-term or takeover interests out of the equation, says CEO Lisa Woll. She also points out that proxy access is already enjoyed in most developed nations.
Proxy access may be focused on governance, but its ESG implications are widespread. "We see governance as a bridge to environmental and social issues," says Dalheim.
Corporate boards are expected to "set the standards of social responsibility of a company, including human rights, and monitor performance and compliance with those standards," writes Martin Lipton, founding partner of law firm Wachtell, Lipton, Rosen & Katz. Additional board expectations are listed in Lipton's post on the Harvard Law School Forum on Corporate Governance and Financial Regulation.
Of course, the 3% stock ownership rule will make it virtually impossible for the SRI community to nominate board members on its own. But it can team up with institutional investors. Calvert plans discussions with the Council of Institutional Investors (CII) and the Investor Network on Climate Risk (INCR), says Dalheim.
Responsible investors should have no problem finding other investors who value ESG. Over $20 trillion in assets under management worldwide have been signed to the United Nations-backed Principles for Responsible Investment (PRI). "It shows the growing interest globally in good governance, social responsibility and environmental leadership," says Smith-even if many of PRI's 800-plus signatories are more broadly concerned with how ESG affects shareholder value.
Electing qualified individual board members is just part of the picture. Dalheim also stresses the importance of companies having board-level oversight regarding ESG risks. Nike Inc. and Intel Corp., for example, have board-level oversight written in their board committee charters, he says.
As for finding qualified directors, he and Schlegel expect this to get easier down the road, thanks to a database of potential director nominees that pension fund leaders CalPRS and CalSTRS are working with others to develop.