Stocks Get New Grade for Friendliness

It wasn’t the headline grabber, but the financial reform bill offers something shareholder advocates have been seeking for years: a better ability to challenge public companies’ boards of directors.

The bill’s final language leaves the matter to the Securities and Exchange Commission, which last year proposed improving proxy access, or shareholders’ ability to field candidates for boards of directors.

That proposal would require companies to put on the ballot any candidate who had the backing of shareholder groups owning at least 1% to 3% of the company’s stock, depending on the firm’s size.

Business groups have strongly opposed the idea, arguing it will make board elections disruptive affairs as unions, environmentalists and other interest groups field candidates to push pet concerns.

But shareholder advocates say too many directors have done a poor job looking after shareholders’ interests. Typically, the board’s own members choose a nominating committee that fields just one candidate per opening, a system critics liken to elections in the Soviet Union. Shareholders can vote for candidates who are not on the company’s official ballot, but that route is expensive, difficult and rare.

Many shareholder groups say that opening elections to more candidates would produce boards more likely to put a lid on executive pay and curb reckless risk taking. Many blame do-nothing directors for the financial crisis.

But some boards of directors are better than others. What criteria should an investor use to evaluate a company’s commitment to shareholders’ interests?

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