Financial Times Editorial Comment: A much needed shareholder victory/US investors get to nominate boards

Financial Times Editorial Comment: A much needed shareholder victory
Copyright The Financial Times Limited 2009
Published: May 21 2009 19:45 | Last updated: May 21 2009 19:45
http://www.ft.com/cms/s/0/0d7bb198-462f-11de-803f-00144feabdc0.html


US corporate boards frequently but misguidedly behave like Victorian parents. Shareholders who are seen but not heard are spoken of with affection; wilful ones are scolded like rowdy children. Corporate law encourages their attitude by limiting shareholders’ control of directors supposed to represent them.

But plummeting stock prices are spurring normally docile shareholders to rebel. In a return to form after the Bush years, the US Securities and Exchange Commission has sided with shareholders by proposing to boost their ability to nominate directors – not a day too soon.

The rule change makes a dent in the current unhealthy cosiness in which executives sit on each other’s boards, approve each other’s pay and select their own successors. Many jurisdictions – the US more than most – keep shareholders near powerless in this process; at best they are graciously permitted to withhold support. Anyone wanting companies run by a self-serving, self-recruiting cabal could hardly improve on this incestuous system.

There are reasons to keep shareholders’ control over company management modest. Executives, who presumably know the business best, need freedom to translate that knowledge into decisions: a corporation is not and should not be a direct democracy.

But nor should it be a dictatorship. “Maximising shareholder value” is supposed to discipline managers, but only does so if shareholders have some say – at least in choosing those who represent them. Recent events show that boards accountable to no one but themselves sometimes let executives destroy the value of the company on their way to personal riches.

In the US today only the board may propose candidates in proxy materials. Shareholders, if they have a right to do so at all, must make nominations through costly proxy fights or at shareholder meetings whose outcome is a fait accompli since proxy votes have already been cast. The SEC now wants to let such shareholders have their nominations included on the proxy materials.

The rule change is so reasonable it borders on timidity. Shareholders must have held shares for a year to avail themselves of it, and will only be allowed nominations for up to a quarter of the total number of directors. The effect on board decisions will be indirect at best.

Still, it opens up boardrooms to independent minds and voices. At a time when groupthink by directors is blamed for getting us all into trouble, shareholders – and society more broadly – are right to hail the SEC’s decision as a victory.








US investors get to nominate boards
By Deborah Brewster in New York
Copyright The Financial Times Limited 2009
Published: May 20 2009 18:34 | Last updated: May 20 2009 18:34
http://www.ft.com/cms/s/0/80f7667c-4561-11de-b6c8-00144feabdc0.html


US shareholders scored one of their biggest victories in many years on Wednesday when regulators proposed new rules allowing them to nominate company directors.

The controversial rule has been considered by the Securities and Exchange Commission three times in the past five years, but failed to pass. The commission voted to propose the rule, by three votes to two. The Republican commissioners were the two dissenters.

The SEC said that it had decided to revisit the rule because the economic crisis had called into question whether boards were exercising enough oversight over companies. It said shareholders had “a fundamental right under state law” to nominate and elect company directors, but were being impeded.

Companies at present nominate their own directors. Shareholders have the right to vote, but not to nominate any directors, except through a difficult process that requires them to mail shareholders at their own expense. The new rule would allow large shareholders such as pension funds to nominate up to a quarter of a company’s board members.

The SEC move is part of a groundswell of support for shareholders’ rights. Publicity over generous executive pay packages and the need for a taxpayer-funded bailout of several large financial companies appears to have changed the regulatory mood.

Mary Schapiro, SEC chairman, has already publicly supported the proposal, saying she would like it to be enacted before the next proxy season, which starts early next year.

The Council of Institutional Investors on Wednesday applauded the move, saying it was long overdue.

Joe Dear, council chairman who is also chief investment officer of Calpers, said: “The credit debacle represents a massive failure of oversight – by boards as well as by regulation... Investors must have the tools to hold directors accountable so they will do a better job of monitoring and, if necessary, reining in management.”

The rule includes two provisions, one of which would allow shareholders who own from one per cent to 5 per cent of stock – depending on the company’s size – for at least one year, to nominate directors.

The second provision amends a federal rule that allows company management to exclude shareholder proposals which nominate directors.

The proposal will be open to a public comment period of 60 days. The SEC staff will then review the comments and make a recommendation to the commission, which will hold a final vote.