SEC Gives Power to Shareholders to Influence Boards

(August 25, 2010) — The Securities and Exchange Commission (SEC) on Wednesday voted 3 to 2, with the two Republican commissioners opposed, to adopt a rule requiring public companies to include the board nominees of shareholders who own at least 3% of company stock in their proxy materials.

The Council of Institutional Investors — a group whose pension funds have total assets of more than $3 trillion — applauded the SEC decision. “This is ground-breaking for US shareowners,” said Ann Yerger, the Council’s executive director. “Access to the proxy will invigorate board elections and make boards more responsive to shareowners and more vigilant in their oversight of companies,” she said in a statement. “The market meltdown represented a massive failure of oversight—by boards as well as by regulators. Proxy access gives investors a way to hold directors accountable so they will be motivated to do a better job of monitoring and, if necessary, reining in management.”

By giving shareowners a bigger voice in electing corporate directors, the SEC has made it easier for shareowners to nominate their own candidates for director when they are dissatisfied with the board’s oversight. Large activist shareholders who want greater control on how companies are run have long fought to have the ability to place their nominees’ names on company proxy statements.

“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,” Mary L. Schapiro, SEC chairwoman, said in a statement by the regulator.

Currently, shareholders must wage proxy fights to nominate directors. Under the new rule, shareholders must hold at least 3% of the company’s stock for at least three years to nominate directors. Approval of the new measures follows enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which provided the SEC with greater authority to make rules addressing shareholder access to company proxy materials.

Under the new rules, according to the SEC:

• Shareholders who otherwise are provided the opportunity to nominate directors at a shareholder meeting under applicable state or foreign law would be able to have their nominees included in the company proxy materials sent to all shareholders.

• Shareholders also have the ability to use the shareholder proposal process to establish procedures for the inclusion of shareholder director nominations in company proxy materials.

The SEC rules will go into effect 60 days after publication in the Federal Register.