The Securities and Exchange Commission (SEC) approved changes that make it easier for shareholders to nominate directors of public companies.
Under the new rules, shareholder groups owning at least 3% of a company’s stock for at least 3 years will be able to have nominees placed on annual proxy ballots sent to all shareholders. And they will have to certify in writing that they don’t intend to use the new rules to change control of the company or gain more seats on the board than the one or 25 percent of the board – whichever is greater – permitted in the new rule.
Under the current rules, investors must appeal to shareholders at their own expense if they seek new directors on a company’s board or a bylaw change.
The new policy is a victory for investor advocates. Supporters argue that the change was necessary, especially considering the aftermath of financial crisis, risks corporations are taking for short-term profit gains and excessive compensation packages for executives. Getting candidates on the board gives supporters a better influence over company policy. SEC Chairman Mary Schapiro has said that the change is “a matter of fairness and accountability.”
However, the business lobbies oppose the new rule arguing that it would shift power to activist investors, result in annual battles for board seats that drain management’s time and make it harder for companies to focus on the long term. The new rules were criticized for not considering the differences between operating companies and complexes of investment companies, for example the unique features of investment companies and the size of the investment company universe.
The U.S. Chamber of Commerce promised to fight the rule aggressively and there may be grounds for legally challenging the rule under the Administrative Procedures Act, which requires such rules to be subjected to cost-benefit analyses.