SEC Steps Up Access to Proxy Process

The Securities and Exchange Commission on Wednesday officially proposed rules that could allow investors to nominate their own candidates to corporate boards, taking a historic step in the long-running battle over shareholder empowerment.

The controversial plan, approved by a 5-0 vote, is an attempt to ensure that corporate board members perform their role as independent watchdogs rather than serve as passive tools of management. At the same time, the SEC proposal comes with limitations that are expected to fuel the debate between investor-rights advocates, who seek easier access to the company ballot, and corporate officers, who fear an infusion of disruptive politics into the executive suite.

Investors and SEC officials noted that it was the first time such a proposal had reached the commission for a vote, despite efforts dating to 1942.

Shareholders already are allowed to field their own candidates for the board. But doing so without the support of management -- and without access to the company’s official proxy ballot -- can entail prohibitive costs related to publishing election materials and delivering them to shareholders. Such efforts generally have little chance of success.

“This year, for the first time in history, the commission has proposed rules that would provide shareholders a procedure that promotes access to the proxy process,” SEC Chairman William H. Donaldson said.

The proposed rules face a 60-day public comment period, and they could be substantially modified before the commission votes on a final version. But the proposal lays out important details of how the SEC hopes to find a middle ground between the demands of management and shareholders -- a balancing act that is drawing fire from shareholder activists.

Under the plan, investors would have to meet certain criteria before being allowed to put candidates on the proxy ballot. One scenario requires a two-stage qualifying process. First, investors who had owned at least 1% of a company’s stock for at least one year would have to persuade a majority of shareholders to vote in favor of directly nominating directors.

If successful, the following year an investor or group of investors who had owned more than 5% of the company’s stock for at least two years would be able to put candidates on the official proxy ballot.

Under an alternative test, the process could begin if more than 35% of shareholders withheld their votes for a director or slate of directors nominated by management.

Depending on the size of a company’s board, investors would be able to add as many as three names to the official proxy.

It was clear Wednesday that investor-rights advocates would be pushing to lower those obstacles, such as reducing the 5% threshold and eliminating the time lag before an investor nominee may be put on the ballot.

“I think the SEC needs to go further, and I hope they do,” said California Treasurer Phil Angelides.

Others urged the SEC to further open up the proxy process -- for instance, by allowing shareholder access to the proxy ballot when a company slips into legal trouble or repeatedly restates its earnings.

“While this is a good first step, we intend to offer further ideas to strengthen the rules’ effectiveness,” said Sean Harrigan, president of the California Public Employees’ Retirement System’s board of administration.

Advocates of corporate reform long have argued that an important way to prevent a recurrence of Enron-like scandals is to make sure that directors exercise spirited oversight and do not passively go along with whatever management says.

The commission’s vote Wednesday “is reflecting the fact that mainstream institutional investors in the United States want an active and open dialogue with the CEOs and boards of companies they’re investing in,” said Scott E. Wendelin, chief executive at Prospect Financial Advisors, a Los Angeles investment bank.

“This isn’t some off-in-the-distant future kind of announcement. It is reflecting the realities we see.”

At the same time, major corporations, led by the Business Roundtable, have cautioned that overhauling the proxy process could destabilize companies and bestow undue power on investors with narrow agendas.

Companies could be affected in different ways, depending, for example, on whether their stock is in the hands of a few, large shareholders or is more widely held, said Keith Bishop, a lawyer with Buchalter, Nemer, Fields & Younger in Newport Beach and California’s former commissioner of corporations.

Firms are concerned “that every election will become like a political election, which could be quite distracting, expensive and divisive to the management of the company,” he said.

The commissioners themselves voiced a range of potential concerns, even as they voted to move ahead with the rule. Commissioner Cynthia A. Glassman wondered aloud whether it would be more sensible to assess the effect of other recent rules on corporate governance before overhauling the proxy procedures.

But Commissioner Harvey J. Goldschmid maintained: “This is a proud, historic day for the commission,” adding that the rule “dramatically alters the balance” between management and shareholders.