The Securities and Exchange Commission voted today to give shareholders greater power to nominate candidates to the boards of public companies, handing unions and institutional investors a win in their campaign to have more say over corporate policies.
The commission voted 3-2 for rules that would allow shareholders to nominate candidates via a company's proxy materials if they have owned 3 percent of its stock for at least three years. The total amount of nominees could not exceed 25 percent of the overall board. Congress gave the commission the authority to issue such rules under the Dodd-Frank financial regulatory act signed into law by President Obama last month.
SEC Chairwoman Mary Schapiro argued that the change was a simple matter of fairness. "I have great faith in the collective wisdom of shareholders to determine which competing candidates will best fulfill the responsibilities of serving as a director. To me, the critical point is that shareholders have the ability to make this choice," Schapiro said in her prepared statement.
But Commissioner Kathleen Casey said that the rule was "fatally flawed," and that it would result in court challenges and swamp SEC staff with brokering disputes over its interpretation. She also said it would trample state laws that govern shareholder rights. "The consequences of this exercise include a series of arbitrary choices that are untethered to empirical data and a number of internal inconsistencies that make the rules difficult to defend," said Casey.
The battle will now play out in board elections as unions, using their pension investments, and other institutional investors push for changes in the boardroom at certain companies. For example, the AFL-CIO and the American Federation of State, County and Municipal Employees launched a campaign against Michael Dell's re-election to Dell Inc.'s board after the computer manufacturer paid a $100 million SEC fine to settle accounting fraud allegations.
"Investors and public interest advocates have looked to the commission to provide greater disclosure in the area of corporate elections for close to 70 years. We applaud Chairman Mary Schapiro and the commission for conducting a thoughtful and deliberate review of the comments it received under the current proposal," said AFL-CIO President Richard Trumka.
The U.S. Chamber of Commerce criticized the decision, arguing that it pandered to a "small group of special-interest activists" while ignoring the needs of most individual shareholders, who will not be able to use proxy access.
"Rather than focusing on good corporate governance, the SEC has given special interests the ability to hold the board hostage on narrow issues at the expense of other shareholders," said David Hirschmann, president and CEO of the U.S. Chamber's Center for Capital Markets Competitiveness.
Only a third of the nation's approximately 8,500 public companies would have institutional investors that would meet the requirement under the rule to nominate directors, Casey said.