(Dealbook)

Democracy can be a messy business — and that goes for Corporate America as well.

The long-debated issue of proxy access, which refers to the ability of shareholders to nominate directors to corporate boards, is coming to a boil this fall. That’s when the Securities and Exchange Commission is set to vote on a proposed rule that would make it much easier for directors not backed by company management to get a place on the ballot at the annual shareholder meeting.

Knowledge@Wharton, an online publication of the Wharton business school, just published an interesting analysis of the proposed rule, which many experts say has a serious chance of passing.

The rule drew a flood of comments from investors, businesses and trade groups during the comment period that ended last month. Here’s just a tiny sample of the opinions expressed:

Roy Bostock, the chairman of Yahoo, said that the proposed rule was “unnecessary” and “ill-suited to the wide range of companies in the marketplace” and argued that it could distract directors from the job of overseeing a business.
The prominent corporate law firm Wachtell, Lipton, Rosen & Katz said the rule “would have negative consequences for U.S. corporations and our nation’s competitiveness.”

But James P. Hoffa, the general president of the Teamsters union, expressed strong support for the rule and called it a “critical — and long overdue — reform.” And Joseph A. Dear, the chief investment officer of the California State Employees Retirement System, said it was a “historically significant reform that will enable investors to hold corporate boards accountable.”

If it is adopted, the rule would allow shareholders with a relatively small stake in a company — at least 1 percent for large companies, more for smaller ones — to nominate individual directors before a shareholder election, instead of having to present an entire slate of directors and wage an expensive proxy battle.

When she announced the proposal in May, Mary L. Schapiro, the chairwoman of the Securities and Exchange Commission, said it “represents nearly seven years of debate about whether the federal proxy rules should support — or stand in the way of — shareholders exercising their fundamental right to nominate directors.”

Many businesses are fiercely opposed to the proposed rule, arguing that it would have a destabilizing effect. Supporters say it will help democratize a process that is often little more than a rubber-stamping ritual.

David F. Larcker, an accounting professor at Stanford University, tells Knowledge@Wharton that the S.E.C.’s proposal is “opening up the proxy machinery to an additional set of people” and calls it a “big deal.” Others have serious concerns, some of which Knowledge@Wharton describes here:

Some say the proposed changes could make it easier for a shareholder to mount a takeover attempt. Others warn that hedge funds with significant company assets could infiltrate boards and push companies to take on high levels of risk for the fund’s short-term gain.

Charles M. Elson, the chairman of the John L. Weinberg Center for Corporate Governance at the Lerner College of Business and Economics at the University of Delaware, suggests the proposed rule will just “create a bigger mess.” He says it would step on similar, more flexible measures already in place in Delaware, where many large companies are incorporated.

“The S.E.C. would be a one-size-fits-all approach, which could work in some circumstances and not work in others,” he said.

Pavel Savor, a Wharton finance professor, sees some exaggeration on both sides of the debate: “People tend to overdramatize these things,” he tells Knowledge@Wharton. “It’s not a cure-all, and it’s not something that will permanently destroy corporate America.”