"S.E.C. to Propose Change in Election of Boards
WASHINGTON — The Securities and Exchange Commission will propose new rules on Wednesday that would make it possible for a company’s shareholders to elect a limited number of independent directors, commission officials said.
If adopted, the proposal would open the door to the most significant change in decades to the role played by investors in governing publicly traded companies.
The proposal would permit large shareholders — typically institutional investors like pension funds or hedge funds — or alliances of shareholders to nominate as many as one-quarter of the directors. For the 700 largest public companies, the proposal would require approval by 1 percent of the shareholders for a dissident slate to be nominated. For smaller companies, it would be either 3 percent or 5 percent, depending on the size of the business.
Board elections bear no resemblance to democratic elections. Voters almost always get only one slate of candidates nominated by the board, and those candidates win even if there is heavy opposition to them. Moreover, efforts by investors to replace directors through a proxy contest can be prohibitively expensive. The new rules would change that.
A similar, though more restrictive, proposal was made during the Bush administration by the chairman of the S.E.C. at that time, William H. Donaldson. But that proposal ran into criticism from many major corporations, lawmakers and senior officials in the Bush administration. The idea was ultimately abandoned in 2004, a year after it was proposed.
Commission officials were bracing on Tuesday for a similar reaction from companies and their trade associations in Washington. They predicted that the two Republican commissioners, Kathleen L. Casey and Troy A. Paredes, would most likely dissent from the decision to issue the proposal for a 60-day comment period.
But led by Mary L. Schapiro, the new chairman of the commission, supporters of the proposal appear to have the three votes to overcome the opposition. Ms. Schapiro vowed at her confirmation hearing last January to move quickly to consider proposals to give shareholders the ability to approve independent directors. She has indicated that she would like the agency to complete its work on the proposals by the end of the year, in time for the proxy season.
Unlike the 2003 proposal, the new one appears to have significantly more political momentum. President Obama has repeatedly endorsed the idea of giving shareholders a greater say in the governance of corporations, and he sponsored legislation to accomplish that when he was a Democratic senator from Illinois.
In February, the Obama administration set limits on the pay of top executives of banks and other companies receiving financial assistance from the Treasury. That policy gives shareholders the right to vote on any proposals to give executives compensation above the limits.
With public outrage growing over mismanaged companies and generous executive pay packages, there is also growing momentum in Congress for giving shareholders a greater role in running companies.
On Tuesday, Senator Charles E. Schumer, Democrat of New York, and Senator Maria Cantwell, Democrat of Washington, announced that they had introduced legislation to give shareholders the right to hold advisory votes on executive pay. The legislation also instructs the commission to issue rules that would permit shareholders to propose their own directors.
“When you buy stock in a company, it should come with some peace of mind that the business is being run responsibly,” Mr. Schumer said. “This legislation will give stockholders the ability to apply the emergency brakes the next time the company management appears to be heading off a cliff.”
The legislation has been endorsed by many large pension funds and labor unions."