SEC Aims to Make Board Elections More Democratic

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."