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From the outraged reaction the idea received, you'd think the Securities & Exchange Commission was considering an end to the free-market system. In fact, the SEC is mulling over something much more modest: a less expensive way for shareholders to nominate board candidates.
The idea is simple. Today, the only way for shareholders to run a candidate for a board seat is to print and distribute their own proxy materials, a cumbersome and pricey endeavor. By allowing investors to place their candidate's name beside those of board-nominated contenders on the company's proxy, the barrier to entry is lowered, and more dissidents likely would run, making boards more accountable.
HOWLS OF PROTEST. Not so fast, says Corporate America. Pfizer (PFE ) CEO Henry A. McKinnell, writing on behalf of the Business Roundtable, warns that it would "diminish board accountability to shareholders" and "turn every director election into a divisive proxy contest." The American Society of Corporate Secretaries predicts divided boards, out-of-control costs, and unqualified directors. Let shareholder nominees be on the proxy, the New York City Bar Assn. opines, and qualified director candidates would refuse to serve.
The howls of protest are so loud one almost wishes the SEC would approve the proposal -- if only to see whether the sky actually falls. And with all due respect to the opponents of "shareholder democracy," the objections being raised aren't convincing.
For one thing, the "divisive" proxy contests predicted by opponents would be rare. As envisioned by the AFL-CIO, one of several groups advocating the change, only shareholders or groups with at least a 3% stake in the company would be permitted to nominate candidates for no more than a third of the directors up for election in a given year. At very large companies, that means anywhere from several to several dozen institutional shareholders would have to agree on a candidate slate, making shareholder nominations on the proxy unusual -- and winning board seats even more so.
SPECIOUS OBJECTION. Even though the SEC seems to be leaning toward some director-election reform, the commission is far from unanimous, and corporate interests are likely to win some compromises that could make the phrase "shareholder democracy" ring hollow. For example, if the ownership threshold is raised much beyond 3%, institutional investors would be practically powerless to place candidates on the proxy.
Perhaps the most specious objection is that the proposal would not bring the desired results, namely accountability. But it's hard to fathom how boards could be less accountable than they are right now. Even after New York Stock Exchange rule changes and implementation of the Sarbanes-Oxley reform law, corporate boards are still accountable to no one.
Except perhaps in the most egregious cases when directors fail, shareholders are virtually powerless to remove them. At annual meetings, investors have just two choices: To vote for the board's nominees or not vote at all, a system that only a tin-pot dictator could love. Surely, any reform that gives shareholders a voice in board elections would be an improvement.
Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.
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