Family businesses worried by proxy access rule
Family-controlled businesses in the US are gearing up for new regulations that will see minority shareholders exerting more influence over board appointments, writes David Bain.
The ruling could not only undermine existing family-owned business structures, but also deter such businesses raising funds in capital markets.
"This proxy access rule is another weapon that shareholder activists and others will use to attack the voting control of family businesses," said Otis Baskin, an associate of the US-based Family Business Consulting Group and visiting scholar at Oxford University.
The so-called proxy access ruling – approved by the Securities and Exchange Commission at the end of August – gives shareholders who own 3%, or more of the company's shares and who have held at least that amount for three or more years the right to demand board appointments.
Baskin said the advocates of the ruling are likely to come from interest groups that might have different agendas to the families that control the business.
He said: "The advocates of this rule have been hedge funds, pension funds and labour unions that have the kind of cash to gain a 3% holding – are they going to always put the interest of the family first?"
Tom Davidow, who runs a consultancy that works with US family businesses, said the proxy access ruling wouldn't be popular with family businesses.
"Frankly, it's a pain in neck for family businesses," he commented. "It's a big distraction and at the very least will be an expensive administrative hassle for family businesses."
The problem is expected to be worse for smaller, closely held family businesses, said Baskin.
"It would not take that much to hold 3% of smaller businesses."
Family businesses might also become more reluctant to raise funds from public markets as a result of the proxy ruling, added Baskin.
"This, in effect, may end up limiting the growth potential of smaller to medium sized companies because it may discourage them from seeking growth capital," he said.
In the US, family-controlled businesses facing greater shareholder activism include bookseller Barnes & Noble, the Hyatt Hotel Group and the New York Times.
Nevertheless, other commentators reckon some family businesses might see the new ruling as little or no threat to running their businesses.
"The three-year holding rule should ensure those shareholders wanting to gain greater influence on board appointments will be working in tune with the interest of the business owners," said Beverly Behan, an expert on board issues, based in New York.
"Some families might see this as an opportunity to bring in new talent for the good of the business," she added.