The Securities and Exchange Commission approved a rule Wednesday making it easier for shareholders to replace corporate directors — a highly controversial move that promises to shake up board elections at many U.S. companies.
The rule, approved on a 3-2 vote, would force companies to print the names of shareholder board nominees on corporate ballots if certain conditions are met. Investors, or a group of investors, seeking to run a slate of board nominees must own at least 3% of the company's stock and have held their shares for a minimum of three years.
Currently, shareholders who want to oust directors must foot the bill for mailing separate ballots — a hurdle that is too costly and time-consuming for most.
Smaller companies are exempted from complying with the rule for three years.
The vote was a significant victory for SEC Chairman Mary Schapiro, who succeeded on an issue that had dogged two previous SEC chairmen. But critics argued that the rule would not stand up to a court challenge.
The rule is "fundamentally and fatally flawed, and it will have great difficulty surviving judicial scrutiny," Commissioner Kathleen Casey said in opposing the rule. She was joined by her fellow Republican, Troy Paredes.
The SEC staff will be burdened with "the unenviable responsibility of brokering disputes" between shareholders and companies every board-election season, she predicted.
Schapiro defended the rule's wisdom, calling it "rational, balanced and necessary to enhance investor confidence in the integrity of our system of corporate governance."
Labor unions and pension funds have pushed for years for so-called "proxy access," complaining that corporate boards have little incentive to be responsive to shareholder concerns because they rarely face contested elections.
The business community contends the rule will harm companies by giving power to activist investors who do not share a company's long-term interests. Businesses also warn that it will set off annual contests for board seats that will distract management from company business and cause boards to become risk-averse and too focused on short-term goals.
Under the new rule, investors will not be able to borrow stock in order to meet the thresholds. They also will not be able to use the new powers for the purpose of seizing control of the company. And they would be limited to nominating candidates for no more than one-quarter of a company's board seats.
The rule is to take effect 60 days after the SEC publishes it in the Federal Register.
The business community, which has been waging war against proxy access since it was proposed, is expected to file a lawsuit against the rule. However, opponents' hand was weakened considerably when the Dodd-Frank Act gave the SEC clear authority to act on proxy access.
Proponents expressed dismay at the phase-in for small companies, warning that they might escape compliance altogether. "A three-year delay can ultimately turn into an exemption," said Council of Institutional Investors Deputy Director Amy Borrus.
She cited the regulatory reform law, which permanently exempted small companies from audit requirements imposed under the Sarbanes-Oxley law after a series of delays.
Commission staff members said they intend to monitor the rule's effects on large companies in the next three years and help smaller companies prepare for the change.
