The Securities and Exchange Commission (SEC), in response to the recent financial crisis and perceived need to hold board members accountable, is working on sweeping reform that could change that.
The SEC stepped up pressure on boards of public companies July 1 by approving an amendment to a New York Stock Exchange rule that would eliminate the so-called “broker discretionary vote” in uncontested director elections. Previously, brokers were permitted to vote their clients’ shares in routine matters if the shareowners did not provide voting direction, and usually they voted in line with management recommendations.
Starting in 2010, brokers will not be able to vote the shares without the shareowners’ specific instruction. This will lower the percentage of votes that a director receives, and if a proxy advisory firm such as RiskMetrics (formerly ISS) recommends a withhold vote for a director, there is a very real possibility the director will not receive the required majority vote to remain on the board.
The SEC proposed a rule that would enable shareholders to nominate a limited number of directors without mounting a proxy contest. Shareholders who meet prescribed ownership thresholds would be allowed to nominate candidates for up to 25 percent of the board. The rule would allow stockholder groups, such as activist hedge funds or institutional investors, to place candidates on a company’s proxy ballot at company expense. All of the candidates would be mixed on the same ballot. The company wouldn’t be allowed to ask shareholders to check a single box to vote for its complete slate, which is today’s standard.
Most observers believe some version of the measure will pass. That is why many companies advocate a weakened version. The SEC’s current proposal would allow proxy access to shareholders holding as little as 1 percent of a companies shares (provided they have held those shares for one year), some opponents argue it should kick in only for shareholders who hold 5 percent of company shares for at least two years. That number would jump to 10 percent if shareholders worked as a group to nominate directors.
While this may sound harmless or even reasonable, the measure would give activist shareholders who hold a small interest in a company – as little as 1 percent – enormous leverage to promote their own agendas. It would require companies to allow, and essentially pay for, these activist shareholders to run a competing slate of board candidates.
Granted, there is plenty for shareholders to be upset about these days. But the answer isn’t to pit one group of agenda-driven shareholders against all others. Corporate boards are designed to hold management accountable to the interests of all shareholders. Allowing special interest groups to rig the proxy rules for their own advantage is simply bad corporate governance. And it is very distracting to companies, taking time away from executives that would be better spent focusing on long-term strategy.