Randomly Noted

You would think, given the onslaught of studies and rulemaking about to come their way thanks to financial reform legislation, the leaders of the Securities and Exchange Commission wouldn’t look  for new things to take on.

Give the commissioners credit. They voted 5-0 today to get the ball rolling on a fundamental review of the basics of corporate democracy in the U.S.

SEC Chairman Mary Schapiro modestly terms the issue “proxy plumbing,” and some of the issues do have eye-glazing characteristics. But this goes right to the heart of actual shareholder rights, issues such as who gets to vote and how the companies that advise those votes are regulated.

The numbers make it look like corporate democracy is alive and well in America. The SEC reports 600 billion shares are voted at more than 13,000 shareholder meetings each year. But behind the numbers are activities such as “empty voting,” which turns on its head the notion that a voting shareholder has an economic interest in seeing his company succeed.

Technically, what the SEC did today was approve the issuance of a “concept release,” a broad call to the interested public to comment on some fundamental questions related to the proxy voting process. The public has 90 days to make their views known. After that, there may or may not ultimately be any action taken by the SEC. If there is action, it likely won’t come for a good while.

Given the technological changes and advances in human cleverness about using market structures in ways they were never intended, and given the salient fact that the last comprehensive view of these issues took place some 30 years ago, you can say it’s about time.

Even for the SEC to recognize the “empty voting” issue has taken a while. An alarm-ringing legal article that outlined the issue quite well (the lead author, Henry T.C. Hu, now works for the SEC) was published in January 2008.

The article said this: because of the growth of derivatives, share lending and other factors, we “permit decoupling of voting rights from economic interest to occur quickly, at low cost, on a large scale, and often hidden from view.”

Certain investors have the legal right to vote on such crucial issues as mergers when their market maneuvers mean their economic interest can be in direct opposition to that of traditional shareholders.

“Empty voting” isn’t the only issue sure to draw comments. The SEC also wants comment on the growing role of proxy advisory firms and whether there’s a case for “enhancing regulatory oversight.”