Heritage Foundation Leadership for America

Background:  On October 14, 2003, the Securities and Exchange Commission issued proposed rules for comment that would require that corporations under certain circumstances to include director nominations by some shareholders on the management proxy. Specifically, the SEC proposal would:

·        Allow shareholders or groups of shareholders that have owned at least 5 percent of shares for at least two years to nominate a maximum of 3 directors depending on board size. Nominated directors must be independent of the groups that proposed them,

·         Trigger the access rules for two years if a director receives more than 35 percent “withhold” votes or if a majority of shareholders vote in favor of a proposal that opens up the nominating process. 

Status:  The proposed regulations are open for public comment until December 22, 2003. They would implement the second part of July 15, 2003 recommendations by the Division of Corporate Finance on proxy rules related to the nomination and election of directors. The first part of those recommendations would be implemented by an August 14, 2003 proposed rule requiring increased disclosure of nominating committee functions. That comment period closed on September 15, 2003.  

Discussion:  In 1942, 1977 and 1992, the SEC looked at election procedures for boards of directors, including some level of consideration of security holder access to proxies. However, this is the first time that the agency has proposed a “universal” ballot.

The SEC fails to make an adequate case for how this proposal benefits consumers. The draft regulations are very complex because the agency attempted to respond to concerns that they could become a back door method for corporate takeovers or manipulated by single-issue groups. This complexity will make them difficult to administer and easy to manipulate.

Turning the annual selection of board members into a regularly contested election campaign may cause some qualified individuals to avoid serving. In addition, it may inhibit the ability of boards to recruit less well known people who have specific technical knowledge that is essential to meeting the boards’ responsibilities. Instead of taking such radical action, the SEC would be better advised to delay any further consideration of this issue until it sees the practical results of other recent improvements in corporate governance.  

Action item: The SEC’s proposed rule should not be approved. 

This brief was prepared by Heritage Research Fellow David C. John.

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