SEC Comm'r, Stanford Professor Attack Harvard About Board Declassification

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By Michael Greene

Dec. 12 — A Dec. 10 paper by SEC Commissioner Daniel M. Gallagher and former Commissioner Joseph A. Grundfest suggests that Harvard University may be liable for violating SEC Rule 14a-9, for including false and misleading statements in proxy soliciting materials.

The paper, “Did Harvard Violate Federal Securities Law? The Campaign Against Classified Board of Directors,” claims that the Harvard Shareholder Rights Project has played a “central role” in the campaign to de-stagger corporate boards of directors. Accordingly, the Harvard SRP has used the shareholder proposal mechanism on more than 120 occasions to pressure boards to declassify.

The paper found that the Harvard proposals have relied heavily on empirical research that portrays staggering boards as categorically detrimental to shareholder interests, but make no mention to the recent empirical research that directly contradicts that position. According to Gallagher and Grundfest, who now teaches at Stanford Law's Rock Center for Corporate Governance, this could be considered a material omission that violates Securities and Exchange Commission Rule 14a-9.

False and Misleading?

According to the paper, Harvard SRP claims to have contributed to the de-classification of boards at “about 100 S&P 500 and Fortune 500 companies.” The paper further notes “[b]y its own count, the Harvard SRP would thus have contributed to the overwhelming majority of S&P 500 declassifications since the program initiated its efforts in the 2010 proxy season.”

In the paper, the authors note that they take no position regarding the ongoing debate regarding board classification, but simply point out that SEC Rule 14a-8 requires that shareholder proposals not be materially false or misleading in violation of Rule 14a-9.

The Harvard proposal uses 35 percent of its limited word count to present descriptions of empirical research that supports its position that classified boards are associated with inferior company performance, the paper found. The paper further notes that the empirical research is “the only hard evidence cited in support of the proposal.”

Gallagher and Grundfest cite two distinct reasons why the description of this literature could be viewed as materially false and misleading.

First, the empirical research is “severely incomplete” and can be criticized “as cherry picking the literature in order to generate the false and misleading impression that the data supporting its position are far stronger than is in fact the case.”

And second, “[t]he Harvard Proposal's categorical nature is … a further and independent cause for concern that it is materially false and misleading.”

In their conclusion, the authors noted that facts regarding empirical studies about classified boards have changed and “participants in this debate are either legally required or well-advised to study recent research findings.”

The paper notes that a conclusion that the proposals are materially false and misleading should allow SEC staff “to issue no-action letters allowing companies to exclude the Proposal from a company's proxy statement, assuming the Proposal is not modified.”

Additionally, the paper claims that “it should also be sufficient to support the grant of declaratory relief in a federal action challenging the inclusion of the Harvard Proposal in the company's proxy.”

To contact the reporter on this story: Michael Greene in Washington at

To contact the editor responsible for this story: Ryan Tuck at

The paper is available at