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Shareholder Power

A myth of US capitalism is that investors in a public company can easily change the board of directors. It was a costly myth during the corporate excesses of the late 1990s and the later bursting of the stock-market bubble.

In many corporations, directors and executives can feel largely unaccountable to shareholders because they are able to heavily influence who's elected to the board. But when they make mistakes and the stock price tumbles, many voting shareholders demand new directors - only to find out just how undemocratic the process of electing new directors is. Investors must endure expensive and complex proxy fights to get a name on the ballot. Usually, the board's slate of candidates easily wins. Real contests are very rare.

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High-profile scandals like Enron showed a general need for new rules in business, but especially in corporate democracy. With more than half of Americans now invested in securities, boardrooms need to have a wider door for fresh faces.

In early October, the Securities and Exchange Commission quietly proposed rules that would make it easier for shareholders to put candidates on the ballot in director elections. The SEC is seeking comment on the proposals and could vote in January on the final rules.

The proposals are a far cry from a California-style recall process. The SEC recognizes a need to protect the independence of boards from hostile takeovers and single-issue activist investors. The proposals would allow shareholders to nominate candidates if two types of 'trigger events" reveal investor discontent. One trigger would be if more than 35 percent of shareholders vote to "withhold" approval of a board-approved candidate. Another would occur if at least 1 percent of investors ask for their nominees to be on the ballot the following year and that proposal is then approved by half the shareholders.

These are still steep hurdles that don't give investors enough clout. In the 2,227 director elections held over the past two years, only about 1.1 percent of the companies had withhold votes that were more than 35 percent. Surely more than 1 percent of companies need a boardroom shake-up. And for companies in immediate need of reform, waiting a year to vote on investor-nominated candidates could lead to no reform at all.

The SEC must ensure that corporate America has better safety valves for quick internal reform. Most shareholders usually support their boards and management, but would welcome having a bigger stick in the closet to bring a stronger spirit of accountability into corporations. More people would invest in companies if they had faith that their representatives actually represented them.


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