Shareholders deserve access to the corporate proxy ballot to nominate directors.
The Securities and Exchange Commission, under a directive to its division of corporate finance to make recommendations by July 15, will examine this most important issue in shareholder activism. Patrick McGurn, vice president and director-corporate programs, Institutional Shareholder Services Inc., Rockville, Md., calls this "the Holy Grail of corporate governance."
Even opponents of such access agree on the importance of the issue. "Board elections go to the very heart of corporate governance," said a letter submitted by the law firm of Wachtell, Lipton, Rosen & Katz. "Allowing shareholders to use the company's proxy statement for director nominations would be a mistake."
The SEC should grant that access.
The SEC posted 405 comment letters, from public and union pension funds and others institutions and individuals, by the close of the comment period.
Exxon Mobil Corp. and Intel Corp. submitted the only comments from corporations, both opposing shareholder access to proxy-ballot nominations. Exxon Mobil officials contend the current method of shareholder nomination, through a proxy solicitation contest, is not costly. A shareholder or group owning 1% or more of a company's shares "can easily afford the cost of a proxy solicitation," Patrick T. Mulva, vice president-investor relations, Exxon Mobil writes.
But he doesn't recognize the vast resources, far beyond a shareholder's wherewithal, a company can command to fight such a solicitation. Robert A.G. Monks discovered that some years ago when he sought a seat on the board of Sears, Roebuck and Co.
Shareholders now play a minimal role in nominating and electing directors. Short of a solicitation, their only option is the meaningless withholding of a vote. Shareholders have virtually no information about the directors.
Exxon Mobil, in its comment to the SEC, makes no concession to shareholders, such as offering to provide information on directors to allow shareholders to evaluate their performance.
Opening the process would be a worthwhile exercise. It would force management and the incumbent board to explain why their candidates should prevail over alternative candidates.
Directors at many companies still aren't getting the message of greater accountability to shareholders, even after the wave of corporate scandals, the reforms of the Sarbanes-Oxley Act of 2002, the SEC rule requiring mutual funds to disclosure their proxy votes, and the record votes for shareholder resolutions.
Some directors, in fact, show absolute contempt for shareholders. One example occurred at Gillette Co.'s annual meeting last month, when only one director — the chairman and CEO — showed up. Another example: Target Corp.'s chairman and CEO refused to allow questions at the shareholders' meeting, also in May.
Yet directors are supposed to represent the shareholders.
Before opening the proxy process, the SEC needs to develop a reasonable mechanism for carrying it out, including who can nominate, how many nominees to allow on the corporate ballot, and how to ensure compliance and other due diligence for alternative nominees.
If the reforms don't work, if they cause problems such as costly disruptions in corporate governance or drops in corporate performance and shareholder value, pension funds and other institutional investors will be the first to cry out to reverse or modify the changes.
But true shareholder democracy deserves to be tried in the world's greatest democracy.