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When securities regulators finish their latest review of corporate proxy rules, shareholders might have more say in choosing who runs their companies.
The Securities and Exchange Commission on Tuesday released a staff report reviewing the shareholder proxy process. In the wake of corporate scandals and attempts to reform corporate governance issues, shareholder proxy reform this week took center stage as SEC officials took a closer look at boards of directors that do little more than rubberstamp executive decisions.
Management controls the current process. Company officials control who and what is on the proxy statement, and shareholders can't vote "No" - they can only vote "Yes" or withhold their votes entirely. Votes can't be cast for individual directors, only for an entire slate. And shareholders who don't return their proxy -- a written power of attorney authorizing a specific vote on their behalf -- within 10 days before an annual meeting leave their brokers to make the choice; most of the time brokers vote for management, giving boards and CEOs carte blanche to keep the status quo.
That may change if shareholders get a greater say. In an effort to restore investor confidence and some semblance of credibility to corporate America, SEC commissioners have started looking at ways to open up procedures for electing corporate directors.
Under current rules shareholders can nominate alternate candidates to the board's slate, but can't include a nominee's name in the official proxy material sent to shareholders. The only way for dissidents to reach other shareholders is to launch a proxy contest that can easily cost more than $25,000. In extreme cases, the price is far higher - witness the struggle for control of Hewlett-Packard last year, when rebel director Walter Hewlett budgeted $32 million for his failed attempt to stop HP's merger with Compaq. By instituting "enhanced shareholder access" to proxy materials, federal regulators could make it much cheaper for shareholders to nominate a candidate to the board of directors. The company may incur the printing and mailing costs of the nominating shareholder proxy card and could place all required disclosure and communications on a Web site.
As you might imagine, there is quite a bit of resistance to even the idea of change.
The Business Roundtable, a powerful forum of corporate CEOs, is leading the charge for keeping things as they are. Corporate honchos are particularly leery of proposals to give shareholders more power in nominating and electing boards; the Business Roundtable is afraid that, by letting the shareholders in on the process, the inmates will be running the asylum. Executives and their allies warn that the rule changes being considered by the SEC could turn every election of directors into a bitter contest that disrupts company operations, increases corporate costs, discourages qualified nominees from serving and fragments boards.
Ideas being discussed by the SEC are two-pronged.
First, they would be triggered caused by an event or condition. For example, a company's failure to act on shareholder proposals that get majority votes. Or the receipt of significant percentages of "withhold" votes on management proposals.
Second, not just anyone would be eligible to rock the boat: A threshold of ownership would be used to determine who can bring action. According to the SEC staff report, the most frequently-mentioned proposals would limit access to proxy materials to shareholders who have owned at least 3 percent to 5 percent of a company's voting stock for a minimum of one year. The theory is that this provides additional certainty that shareholder access would not be used for frivolous actions or surreptitious contests for control.
The commission is seeking public comments on these proposals ahead of votes in late August and in September. We will keep a close watch on these developments.
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