As California goes in corporate governance, so could go the country, at least in terms of dictating shareholder nominations to corporate boards. But California shouldn't set these terms for the nation.
A bill titled the Corporate Elections Fairness Act of 2004, introduced into the California Assembly and sent in mid-March to its Banking and Finance Committee, calls for any publicly traded corporation doing business in California to allow shareholders to nominate candidates for at least 40% of the directors up for election.
That would trump the Securities and Exchange Commission proposal to allow shareholders access to the corporate proxy ballot to nominate one or two directors under two specific circumstances.
Some in the business community oppose even the SEC's proposal, which we have argued is too limited, and challenge the SEC's authority to supercede the rights of states to make such corporate law.
Thomas J. Donohue, president and chief executive officer of the U.S. Chamber of Commerce, said at an SEC roundtable discussing the proposal in March that the business group "may go to the courts to test" the SEC proposal, if it is adopted.
The SEC proposal has received mixed reviews from some major institutional investors, judging from comment letters and the recent SEC roundtable. TIAA-CREF supports it as is, believing it strikes an appropriate balance between corporate and shareholder interests. Others, such as T. Rowe Price Associates Inc. call for toughening the triggers.
But the California bill clearly reaches too far. The state is trying to dictate this area of corporate governance beyond borders of state incorporation.
Kevin Shelley, California secretary of state, sponsored the bill. "The secretary of state is making this his top priority," said Willie Guerrero, assistant secretary of state. "I don't see any potential pre-emption issue (with the bill in terms of conflicts with federal or other corporate law), at least that's what our attorneys say," Mr. Guerrero said.
Under the bill, shareholders would be required to own at least 2% of the voting stock for at least two years to be eligible to nominate directors.
Another feature of the bill would require corporations to implement shareholder resolutions that receive a majority votes, unless marked advisory. Corporations would face a fine of $100,000 each day they failed to implement such a proposal. That mandate is too precipitous for a number of reasons. Shareholder activism needs to call for more continued self-motivation, not necessarily more corporate regulation to confront corporate governance issues.
Getting back to the nomination feature of the bill, Charles M. Elson, law professor, University of Delaware, and director of its Center for Corporate Governance, questions whether the bill could overcome legal challenges and has what he thinks is a better idea.
First, he prefers nominations be left to board nominating committees, composed of independent directors. Second, he doesn't support giving shareholders who want to contest nominations access to the corporate proxy ballot.
Instead he believes they ought to use an avenue available now — running their own proxy contests — although with an enhancement. He says corporations ought to reimburse the shareholders who run the dissident slates for their costs in proportion to the votes these nominees receive. Reimbursement would range from nothing for dissident nominees who receive no votes to 100% for dissident nominees who receive a majority of the vote.
But that idea ignores a fundamental right of shareholders to directly nominate candidates to the board, which the SEC proposal only partly acknowledges, although it at least gives shareholders some access.
As one panelist quipped at the recent SEC roundtable, There should be no independent directors, only directors dependent to shareholders.