The proxy access rule for corporate board elections, recently approved by the U.S. Securities & Exchange Commission in a 3-2 party-line split following decades of deadlock, remains a big source of debate and a lawsuit challenging it has been filed.
The rule, which the SEC received permission to write under a provision in the new Dodd-Frank Wall Street Reform and Consumer Protection Act, will enable shareholders to nominate their own directors and have them included on standard corporate ballots without additional expense. However, the SEC has delayed implementing the rule because of the lawsuit. The delay means the rule won't be in place in early 2011, when most U.S. companies plan to send proxy statements to investors.
Would proxy access be overused and abused to the detriment of companies and the average shareholder, as some opponents argue, or could it really be a good thing?
"Overall we're very happy the SEC has finally established this rule. We think it's an important part of shareholder democracy and can improve corporate governance and board accountability," says Stu Dalheim, director of shareholder advocacy for the Calvert Asset Management Company. "It's really valuable because it has the potential of getting in a new group of people to broaden and challenge conventional thinking."
Calvert had initially been concerned about short-term investors pushing short-term earnings at the expense of long-term performance. But the rule's minimum requirements of 3% stock ownership over the past three years should help alleviate that, says Dalheim. In addition, the number of nominees that a shareholder or group of shareholders may nominate in any election is not permitted to exceed 25% of the total number of board members.
Majority voting, required by nearly three-quarters of S&P 500 companies, can also help thwart the election of unqualified nominees. Calvert would like to see majority voting established as a government standard and is filing more resolutions on this issue, says Dalheim.
Mark Schlegel, co-founder of MoxyVote.com, believes the challenges of meeting the 3% threshold, finding qualified directors, and getting other shareholders to vote for them will help keep proxy access from becoming a free-for-all. "The concern of inmates running the asylum is overblown," he says.
Instead, Schlegel sees proxy access benefiting all shareholders-from the socially conscious to the strictly stock-gain conscious. His rationale: nominating directors who can ask the right questions makes companies more profitable. Recent corporate crises demonstrate what happens when boards fail to ask those questions.
"BP was an environmental issue that became every shareholder's issue, costing billions and billions," says Schlegel. "Can you say proxy access definitely would've prevented BP or Lehman? No, but I sure would've liked to have had that opportunity." he says.
Schlegel expects companies that have had egregious environmental, pay and other mismanagement problems will be the first ones targeted for proxy access. He anticipates many more new director nominations will follow. The rule won't apply to smaller companies until after a three-year phase-in period.