The Securities and Exchange Commission must open up the corporate proxy ballot to allow shareholders to nominate at least some directors and should do so, if possible, in time for 2007 annual meetings.
Investor confidence has been shaken by what seems to be a constant stream of corporate scandals, stretching in recent memory at least from Enron Corp. and WorldCom Inc. to the latest revelations of unethical and possibly illegal actions by Hewlett Packard Co. in obtaining personal phone records, which led to the resignation of three directors, including the chairman.
The HP trouble closely followed the disclosure of options backdating at many companies to furtively boost executive compensation. The SEC is investigating more than 100 companies for possible breaches of securities law or fraud resulting from such backdating.
These activities all suggest board-level involvement or at least oversight.
The board is charged with watching over management on behalf of the shareholders. But it is clear that many boards have failed, perhaps because they are too friendly with management. Many appear to have become lapdogs, rather than watchdogs.
The pool of executives from which directors are chosen needs an infusion of new blood to improve the breed. And directors must be made to answer more directly to shareholders.
Shareholder access to the director nomination process — called the holy grail of corporate governance — would help ensure greater board accountability.
The SEC plans to meet Oct. 18 to revive the idea it should have adopted three years ago, when it proposed permitting shareholder access under limited conditions. It never brought the proposal to a vote. But now it should adopt a rule permitting access with fewer restrictions than its initial proposal.
The meeting was spurred by a 2nd Circuit U.S. Court of Appeals decision in favor the $600 million American Federation of State, County, and Municipal Employees Pension Plan, Washington. The plan appealed the exclusion in 2005 by American International Group Inc., New York, of an AFSCME fund shareholder proposal that sought to amend corporate bylaws to allow shareholder-nominated candidates on the corporate ballot.
The AFSCME plan filed suit after the SEC's division of corporation finance issued an advisory opinion to AIG, allowing the company to omit the AFSCME plan's proxy access proposal.
The appeals court ruled the SEC was wrong in allowing AIG to omit the AFSCME proposal from the company's proxies.
All investors should commend the AFSCME for its initiative, tenacity and perseverance in pursuit of better shareholder access, from bringing proposals in 2003 that led to the SEC proposed rule, to pursuing the bylaw changes at AIG. (The AFSCME is no longer pursuing nominations at AIG after the company made changes the fund found satisfactory, said Richard C. Ferlauto, director of pension and benefit investment policy.)
One change the SEC could make would be to require majority vote of shareholders for the election of directors. That would make it difficult for single-agenda candidates to be elected to the overall detriment of corporate performance.
Harvey L. Pitt, former SEC chairman and now chief executive officer of Kalorama Partners, a business consulting firm, told the Council of Institutional Investors at its September conference that shareholders should be allowed to establish procedures to nominate directors through access to the corporate proxy ballot. He criticized the SEC for arbitrarily denying such proposals. He said access could help make corporate boards more accountable to shareholders.
"The widespread abandonment of ethical, moral and legal obligation contributed to the loss of investor confidence," he said. "It is important (to) use your collective ownership for constructive and prudent" oversight of corporations. "Corporate governance and disclosure should play a role in where to invest," he said. Some empirical evidence shows companies with better governance and transparency outperform other companies, he added. He said investors should take that relationship into account in their investment decisions.
The SEC ought to act quickly to make the idea a reality.
