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Opening Corporate Boards

July 17, 2003



The Securities and Exchange Commission's new proposal to make it easier for shareholders to nominate and elect corporate directors is a good idea in theory. Whether it has the desired effects depends on how carefully the SEC writes the rules to implement it.

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Under current regulations, corporate shareholders elect directors and can nominate board candidates at an annual meeting. But they can't force the company to include a shareholder nominee's name on the proxy ballot sent before the meeting to all shareholders, most of whom vote by mail. This gives corporate boards almost total control over their membership.

The new rules would change that, allowing a "qualified shareholder" to nominate a board candidate if a triggering event occurred. The SEC has yet to define qualified shareholder or triggering event. Some recommend that the former could be someone who owns from 3 percent to 10 percent of a firm's stock. The latter could be either management disregard for a resolution adopted by a majority of shareholders, or "significant" abstention in board elections. The number of shareholder candidates would probably be limited to one or two, or at most 25 percent of the board.

Changes are needed, both to protect shareholder interests after the recent corporate management scandals and to accommodate the rising number of long-term institutional investors. The institutions - mostly pension and mutual funds in which many Americans have their retirement savings - can't just sell a stock when they don't like what management is doing, which is Wall Street's traditional provision for disgruntled investors. That's too disruptive to the market and the funds' long-term interests.

Whether the proposal serves shareholders or instead opens up ways for meddlers and takeover artists to create havoc inside a corporation depends on how the SEC writes the rules. Right now the proposal is on a fast track. The SEC should slow down to make sure it gets the rules right.

Slowing down would also help thousands of small corporations, which are still reeling under the new paperwork created by the Sarbanes-Oxley reforms and new regulations from the New York Stock Exchange and the NASD. They need time to digest the changes and adjust.

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