WASHINGTON -- The Securities and Exchange Commission on Wednesday approved changes that make it easier for shareholders to nominate directors of public companies.
The 3-2 vote allows groups that own at least 3 percent of a company's stock to put their nominees for board seats on the annual proxy ballot sent to all shareholders. The new financial overhaul law enacted last month formally gave the SEC the authority to make the change.
Under the current system, 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 was long sought by investor advocates. But business groups, including the U.S. Chamber of Commerce and a group representing chief executive officers of large corporations, oppose it. The panel's two Republican commissioners voted no. One of them warned that it would likely be overturned by a court.
The change comes as investors are angry about risks corporations are taking for short-term profit gains and extravagant compensation packages for executives. Getting candidates on the board gives supporters a better shot at influencing company policy. For a majority of public U.S. companies, the policy change will be in place in time for next spring's corporate elections season. But it will be put off for three years for the roughly 5,000 companies deemed small, with $75 million or less in market value, of the total 10,000 to 12,000 public companies.
SEC Chairwoman Mary Schapiro has said the vote was one of the most contentious issues ever addressed by the agency. The change is "a matter of fairness and accountability," she said at Wednesday's meeting.
But Commissioner Kathleen Casey called it "so fundamentally and fatally flawed that it will have great difficulty surviving judicial scrutiny." The new rules favor big institutional shareholders over individuals, she said.
Casey and Commissioner Troy Paredes, the two Republicans on the panel, maintained the rules will trample states' rights. States are allowed to establish their own procedures for companies based within their borders for conducting shareholder elections. That's an area where court challenges could come in, Casey suggested.
A U.S. Chamber of Commerce official called it "a giant step backwards for average investors" and said the organization plans to fight it. He didn't say specifically whether the Chamber would mount a legal challenge to the new rules.
Supporters say the change was necessary, especially in light of the risks taken that led to the financial crisis. The new rules are likely to be used "only in egregious cases where boards have ignored shareowners' concerns," said Amy Borrus, deputy director of the Council of Institutional Investors, which represents public pension funds. Yet the fact that the tool is there could make directors more responsive, she added.
Under the new rules, the shareholders will need to have held the minimum level of stock for at least three years. In addition, shareholders won't be able to borrow stock to meet the minimum 3 percent level. 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 regime.
Until now, the SEC hadn't made a thorough review of the proxy system in 30 years. In that time, there have been numerous changes in technology, shareholder demographics and the structure of share holdings.
"Corporate accountability is important, particularly for the small number of runaway CEOs who can wreck our economy," said Sen. Chuck Schumer, D-N.Y., who wrote the provision in the financial overhaul law giving the SEC authority to make the change.
"This proposal strikes the right balance by specifically empowering those shareholders who take a long-term perspective," he said.