Whose board is it?
Lawmakers trying to avert the next Wall Street bailout are still struggling to reach consensus on how to overhaul the country’s financial regulatory regime. One sticking point has been a proposal to let the Securities and Exchange Commission give shareholders more say over who gets elected to boards of directors. Business groups fiercely oppose it, arguing that it would give labor unions and public pension plans the power to force their agendas on management. But a more likely result is that directors would have to become more responsive to shareholders’ concerns about executive pay and corporate governance.
Buying shares in a company entitles shareholders to little beyond the power to elect the company’s board. Yet when it comes time to vote, they typically confront an uncontested election and a Soviet-style choice: support the candidates chosen by management or withhold their votes. What’s worse, the board may decide not to drop directors even if they receive votes on less than half of the ballots returned.
To actually replace directors with their own candidates, disgruntled shareholders have to go through the daunting process of mailing their own proxy ballots and campaign materials to shareholders. The Securities and Exchange Commission proposed last year to ease the process considerably by enabling large shareholder groups -- those holding at least 1% of the stock -- to add nominees to the official proxy ballot sent out by the company. The commission’s authority to impose such a requirement is not clear, however, so the legislation introduced by Senate Finance Committee Chairman Christopher J. Dodd (D-Conn.) and the financial overhaul bill passed by the House would explicitly grant it that power. Dodd’s bill also would require directors to resign if they didn’t receive a majority of the votes cast in uncontested elections, although the full board could reject the resignation.
The proxy access rule and majority vote requirements would break from the longtime practice of having states set the rules for corporate governance. But it makes sense to adopt a common standard for the fundamental issue of shareholders’ right to elect directors. The commission should temper the proxy access rule by requiring groups to disclose their intentions when seeking to replace directors. But the risk of special interests hijacking boards to promote their own agendas is mitigated by the fact that giant mutual funds and institutional investors hold about 70% of the typical company’s shares, and they effectively represent the mainstream. The bigger threat is boards being hijacked by management. As the scandals over giant pay packages for failed executives and asleep-at-the-switch directors illustrate, that’s already a problem in too much of corporate America.
