By Jesse Westbrook (Bloomberg)
The U.S. Securities and Exchange Commission may let shareholders who own 1 percent of the biggest companies nominate directors on corporate proxy statements, giving investors a new tool to overhaul boards at banks blamed for helping fuel the financial crisis.
The SEC will probably consider the proposal, which would apply to companies with market values exceeding $700 million, at a May 20 public meeting in Washington, said three people familiar with the matter. Investors would have to own a larger proportion of shares to nominate directors at smaller companies, said the people, who declined to be identified because the plans are still under discussion.
“This is going to strike chief executives of all public companies as confrontational,” said James Cox, a law professor at Duke University in Durham, North Carolina. “It gives shareholders a significant amount of leverage.”
The SEC is responding to investor complaints that directors are too cozy with management and failed to block decisions that led to $1.4 trillion of writedowns and credit-market losses at banks including Citigroup Inc. and Bank of America Corp. Efforts by labor unions and public pension funds to gain more authority over corporate boards have stalled amid company opposition.
A final decision on the proposal’s content hasn’t been made, SEC spokesman John Nester said. “We are committed to considering new rules that would remove barriers so that shareholders are able to exercise their right to nominate directors.”
Activist investors such as Carl Icahn and Nelson Peltz have waged successful proxy fights to get their nominees elected to boards of companies they say are underperforming. Under current SEC rules, the process requires distributing a separate ballot listing dissident nominees. Unions and pension funds say the process is too expensive for most investors to pursue.
The SEC plan would let shareholders, or groups of investors, who have held 1 percent of a company’s shares for one year nominate directors on the proxy. The threshold would be 3 percent for companies with market values of less than $700 million and 5 percent for companies below $75 million.
SEC officials are discussing whether to make clear that the proposed rules wouldn’t supersede state measures, the people said. Including such a provision may protect the SEC against lawsuits, Cox said.
The U.S. Chamber of Commerce, which represents more than 3 million businesses, argued in an April 28 letter to SEC Chairman Mary Schapiro that states, not the SEC, have authority over director elections. The nation’s biggest business lobby has been consulting with lawyers at Gibson, Dunn & Crutcher LLP, which represented the group in a successful 2006 challenge of an SEC rule that required mutual funds to name independent chairman.
The agency may get a boost from U.S. Senator Charles Schumer, a New York Democrat who plans to introduce legislation that clears the way for the SEC to “grant shareholder access to the corporate proxy,” according to an April 24 letter he sent to other lawmakers.
The SEC may stipulate in its proposal that investors can revise corporate bylaws that govern director elections, the people said. Doing so would give investors a pathway to nominating directors on corporate ballots in states with restrictive proxy rules.
The SEC typically seeks comments on rule proposals for 30, 60 or 90 days. The agency’s staff then determines whether to make any changes before the SEC chairman and the agency’s four commissioners hold a second vote to make regulations binding.
Delaware, where Citigroup and Bank of America are incorporated, last month passed a law that allows companies to revise their bylaws so shareholders can nominate board candidates on proxy statements.