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The Securities and Exchange Commission (SEC) voted Wednesday, August 25, to give shareholders a greater say in nominating corporate boards of directors at publicly-traded companies starting in 2011. The agency passed the controversial rule by a 3-2 vote, with both Republican commissioners casting dissenting votes.
The SEC proposed the rules last year, and since then has received more than 600 comments. SEC Chairman Mary Schapiro stated before the vote that "the concept that shareholders can directly participate in the director nomination process--without having to mount a proxy contest--has been debated for over 30 years." In fact, she continued, "this is the fourth time in recent memory that the Commission has considered the question of amending our proxy rules to address so-called 'proxy access.' "
Some of the debate over the proposed rules last year was whether the SEC had the authority to adopt such rules, Schapiro said. But the Dodd-Frank Wall Street Reform and Consumer Protection Act, she said, "specifically states that the SEC has authority to adopt rules that require companies to include shareholder board nominees in company proxy materials."
"As a matter of fairness and accountability, long-term significant shareholders should have a means of nominating candidates to the boards of the companies that they own--candidates that all shareholder-voters may then consider alongside those who are nominated by the incumbent board," Schapiro said. Under the new rule, "proxy access" will be available to a shareholder, or group of shareholders, who own--and have owned continually for at least the prior three years--at least 3% of the company's voting stock.
"We are pleased with this vote because it ends several years of debate on this topic," Jim Allen, CFA and head of capital markets policy for CFA Institute, told Investment Advisor in an e-mail message. "We only see this being used in cases of the most egregious governance or board failures because of the difficulty and cost involved in getting a shareowner nominee elected to the board. There are a number hurdles that a shareowner nominee will have to clear before he or she can take a seat at the board. First, a shareowner will have to acquire three percent of the company's shares for at least three years. Then they will have to go through the legal process of dotting all the I's and crossing all the T's to ensure nothing is missed and no lines are crossed in getting on the proxy statement. Then, and most importantly, the nominee will have to receive more shares than the board's nominee. Should all of that take place, the shareowner nominee would take a seat at the board."
SEC Commissioner Kathleen Casey, who vote against the rule along with Commissioner Troy Paredes, called the "proxy access" rules "fundamentally flawed" and "unnecessary," adding that adoption of the rule would be "damaging to our capital markets."