Beverly Goodman

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SEC Aims to Make Board Elections More Democratic

Beverly Goodman

Add a new term to the corporate-governance lexicon: corporate democracy. But not everyone agrees it's such a good idea.

The Securities and Exchange Commission released today its suggested changes to regulations that govern proxy rules regarding procedures for the election of corporate directors, and its suggestions signal the agency aims to make the election process more democratic.

The SEC's review addresses all aspects of how boards are shaped -- the nomination process, elections of directors, the solicitation of proxies for director elections, contests for corporate control -- as well as how shareholder proposals are handled and the disclosure requirements imposed on large shareholders.

"For too long companies have ignored shareholder votes and resolutions," says Charles Elson, director of the Center for Corporate Governance at the University of Delaware. "This comes out of that frustration. Boards need to be more inclusive."

The SEC guidelines would make it easier for large shareholders to submit names to be included on a proxy that nominates directors. Currently, the existing board puts its candidates on a proxy; if shareholders want to submit their own names for contention they must register with the SEC, print their own proxies, send out their own mass mailing, etc.

The new suggested guidelines do not specify how much ownership would be required for the ability to submit director names to be included on the proxy, but the commonly discussed amount is 3% to 5%.

The guidelines also would require that boards disclose the details of the nomination process, specifically how the directors are chosen, an explanation of the screening process, the required qualifications, how shareholder nominations are viewed and the like.

"The SEC is clearly taking this issue seriously," says Adam Kanzer, general counsel and director of shareholder activity for Domini Social Investments. "The current process is not a true election. It's not open enough."

Critics, though, say it shouldn't be a true election. "Democracy is good in government, but we should not rush into that in business. Business is different," says Keith Bishop, a securities attorney and partner with Buchalter, Nemer, Fields & Younger in Los Angeles. "The political model doesn't work here -- shareholders change too quickly. You have to tie decision-making to sound economic analysis, not an idealized view of corporate governance."

Granting investors increased involvement in electing corporate directors will only lead to expensive annual battles that could drain the resources of boards and distract them from their function, Bishop says. "Every year directors will have to argue why they should be elected vs. a shareholder's nomination," he says. "It can have a destabilizing effect."

Corporations themselves, not surprisingly, have argued vehemently against such measures, most adding that the new round of regulations targeting corporate governance was quite sufficient. ExxonMobilXOM, for instance, submitted its comments to the SEC, saying that granting shareholders access to the proxy statement "would be detrimental to good corporate governance" and urged the agency to "stay on course with the significant corporate-governance reforms already enacted."

The SEC is still seeking comments, and will draw up official regulations after the next comment period ends -- likely by September.