Investors Seek Proxy Election Reform

To many corporate governance and investor activists, annual director elections are a big charade.

After all, the only names that appear on shareholder voting ballots are those that already have the blessing of the existing board. Investors get only a “yea” or a “nay.”

Now, amid a crisis of investor confidence, support has been growing for the once-fringe notion that companies should hand over coveted space on their annual meeting proxies to shareholders’ board nominations.

Regardless of the outcome, it’s an issue that companies, regulators and even state lawmakers are finding harder to ignore.

Labor groups are in the midst of a big push that would give shareholders the right to place their own director choices on a proxy, a move that would make it significantly easier for investors to elect alternative directors.

Not having direct access to the corporate ballot means that investors have to spend huge sums to orchestrate a proxy contest, a step that’s ordinarily reserved for hostile takeover attempts.

Activist investors insist, however, that the only way to prevent a repeat performance of last year’s string of corporate scandals is to give shareholders more power to choose their own independent directors.

“I think that if we are trying to see to it that the corporate governance system works, then this is an inevitable reform,” said Damon Silvers, associate general counsel at the AFL-CIO.

Given that blame for recent financial scandals has been pinned, in part, on a lack of board accountability to shareholders, that sentiment has been finding supporters beyond the activist community.

In January, a blue-ribbon commission of corporate executives, investors, former regulators and other experts opined about the hurdles investors face in the election process.

Although the panel, convened by the Conference Board last June, stopped short of recommending an automatic shareholder right to see their nominations on the proxy, members decried a process whereby “shareowners have no meaningful way to nominate or to elect candidates short of waging a costly proxy contest.”

Even more striking was an article recently penned by Delaware Chancery Court Chancellor William B. Chandler III and Vice Chancellor Leo E. Strine Jr. Sounding less like judges from the nation’s most prominent business court and more like investor activists, the pair described the election process as a “forgotten element to reform.”

In pointed language, they called for the examination of the “management-biased corporate election system” and suggested that policymakers take up the issue of requiring equal access to “the proxy machinery between incumbents and insurgents with significant nominating support.”

Companies don’t share the same vision and have been fighting attempts to give shareholders direct access to the proxy.

Citigroup Inc. mounted a successful effort to block a binding shareholder proposal that, if implemented, would have permitted a shareholder or group of shareholders owning at least 3% of Citigroup’s shares to include a director nominee on the company’s proxy card. Citigroup’s winning argument to staff at the Securities and Exchange Commission was that proxy rules prohibit proposals that result in contested elections of directors.

The Citigroup proposal was one of about half a dozen binding and nonbinding proposals sent by the American Federation of State, County and Municipal Employees to about half a dozen companies. All have asked the SEC to block the proposals, a union official said.

Showing no signs of a retreat, however, union officials plan an appeal of the SEC’s Citigroup decision, a step that could land the issue in the laps of the commissioners themselves.

Under outgoing Chairman Harvey Pitt’s watch, the SEC has shown a willingness to expand the rights of shareholders to bring controversial issues to the fore at annual meetings -- over objections from companies -- and union officials are waiting to see whether that trend continues under the watch of William Donaldson, who was confirmed for the post late Thursday.

The proposal seeks to “in effect take a fake democratic process and make it real,” said Michael Zucker, AFSCME’s director of corporate affairs.

A Citigroup spokeswoman didn’t immediately return a call for comment.

An SEC spokesman declined to comment.

Opening a second front, the AFL-CIO plans a rule-making petition asking the SEC to create an absolute right to allow shareholders direct access to the proxy.

Such talk about shareholder democracy has an alluring ring, especially in this age of financial scandal, observers say. But whether that will translate into action is a question mark. Critics say that such a move could open a path for unwanted corporate raiders, though proponents advocate built-in requirements -- such as long holding periods -- to curb attempts to put a company in play.