Proxy Access and Corporate Governance

The financial reform bill that passed last month contains an important provision to open up corporate governance. Bloomberg BusinessWeek reports that a little noticed provision in the bill could have a dramatic effect on board elections:

Buried on page 1,257 of the legislation is language authorizing the Securities & Exchange Commission to let investors nominate directors on corporate proxies—the ballots and other information that companies mail to shareholders. Right now only the official nominees picked by management appear on the ballots.

It would be as if a country's ruling party controlled the ballot, and an opposition party had to send out competing ballots to voters. The proxy access rules being considered by the SEC under the new law would allow shareholders with three percent of a company's shares to have their nominees appear on the proxy statement the company sends to all shareholders. The shares would have to be held for at least two years to encourage shareholders to take a longer view of a firm's value. (It would be nice to see more managers take this view.) Even though gathering three percent of outstanding shares to mount a proxy challenge will be difficult, managers are nervous.

Patrick McGurn, special counsel at Institutional Shareholder Services, which advises large investors, says that "directors and CEOs almost view the inclusion of an outsider as an invasion. They think this person is going to be a disruptive force in the boardroom."

Executives traditionally see shareholders as an annoyance to be tolerated once a year at annual meetings. Opening up the proxy would go a long way to making shareholder democracy a reality rather than a myth.