Securities and Exchange Commission in US to meet Wednesday to finalise plan for shareholder power

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Written by Ray Clancy

Monday, 30 August 2010 11:29

Shareholders may soon get more power to shake up corporate boardrooms in the US after the financial crisis exposed glaring weaknesses in how companies were managed.

The Securities and Exchange Commission will this week to decide whether to adopt a rule that would give shareholders an easier way to nominate corporate board directors.

Giving shareholders the ability to place their director nominees on the corporate proxy statement has long been sought by big activist shareholders who want more say on how their companies are run.

Demand for proxy access increased after the government used billions of dollars in taxpayer funds to prop up companies like American International Group and Bank of America.

‘Corporate boards are the first line of defence to some of the excesses that led to the global financial crisis,’ said the Council of Institutional Investors, which represents public, union and corporate pension funds that hold more than $3 trillion in assets.

According to the plan under consideration, shareholders would have to hold at least 3% of the company’s stock for a minimum period of three years in order to nominate a director. Small companies, or companies with less than $75 million in market capitalization, could be given a three year delay to comply with the proxy access rule.

Over the past decade, two other SEC chairmen have tried to adopt proxy access rules with no success. This time, the SEC has backing from the Dodd Frank financial regulation bill, which affirms the agency’s authority to adopt proxy access rules.

The legislation will help shield the SEC from some lawsuits. In the past, the business community has threatened to sue the SEC saying the agency does not have the power to adopt the rule.

However, former Republican SEC Commissioner Paul Atkins said he still expects the SEC to be sued if it adopts a proxy access rule. ‘Because of the disparate treatment among shareholders that is one of the prime reasons that a challenge could arise. I think something like that could be successful,’ he said.

The SEC had contemplated setting the holding period at one year and creating a sliding scale ownership threshold between 1% and 5%. But critics had argued that the one year holding period was too short and that only requiring shareholders to own 1% of a large company would make it too easy for companies to fall prey to special interest groups.

Big investors such as the Council described the 3% ownership level as a ‘very challenging but reasonable hurdle to impose on groups of long term investors’.

Currently, shareholders are able to nominate their own directors but must wage a proxy fight in order to do so. That process is considered expensive and burdensome, according to large activist shareholders.