Shareholder democracy finally in sight, if SEC does the right thing

Monday, October 9, 2006
by Marc J. Lane

Reprint permission from the October 9, 2006 issue of Crain's Chicago Business.


Corporate shareholders are poised to reclaim their authority over the boardroom. Within months, they may be able to elect directors who are answerable to them, without bankrolling an expensive proxy contest against management's hand-picked candidates. And the spurious practice of permitting shareholders only to withhold support from incompetent or double-dealing directors — but never to oust them — may soon be outlawed.

Here's the back story: Late in 2003, one of the country's largest public service employee unions filed a proxy-access proposal to allow shareholders to nominate directors at insurance powerhouse American International Group (AIG), whose shares were held by the union's pension plan. After the U.S. Securities and Exchange Commission sided with AIG in refusing to include the proposal among the votes put to shareholders, the union went to court. It lost.

But last month, the 2nd U.S. Circuit Court of Appeals in New York overturned the trial court's judgment, making it easier for shareholders of New York, Vermont and Connecticut companies to nominate directors, and forcing the SEC to decide who controls the nation's publicly held companies.

Although the appeals court gingerly avoided the policy debate about shareholder access to the corporate ballot, the issue is clearly in play. Just two days after the court decided the case, SEC Chairman Christopher Cox, whose agency was admonished by Circuit Judge Richard Wesley for its muddled handling of shareholder proposals seeking proxy access, committed to standardize the "town meeting rule" that guides the commission's staff in issuing no-action letters on election-related shareholder resolutions.

The SEC will hold a public hearing on Oct. 18 to propose a new rule on shareholders' nominations of directors. After the public has an opportunity to comment, the agency expects to have a final rule in place before next year's proxy season.

We've been here before. In 2003, the Business Roundtable, representing entrenched CEOs and other self-interested big-business activists, lobbied hard against SEC-proposed rules to afford shareholders a meaningful role in director elections without waging proxy wars. The proposed rules were never adopted because opponents successfully argued that shareholder democracy might allow special interests and short-term agendas to divert management's attention from long-term corporate growth.

And, without public outrage, the SEC might now succumb to the same pressure and adopt a rule that lets companies ignore shareholder proposals seeking proxy access on their ballots.

Shareholders deserve the right to replace ineffective, wrongheaded, complacent or crooked directors. Let's urge Mr. Cox and company to open up the ballot box and ensure that board members are accountable to those whose capital is at risk.

Chicago attorney and corporate governance expert Marc J. Lane is president of Marc J. Lane Investment Management Inc.

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Copyright © 2006 by Crain Communications Inc.

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