SEC Expands Shareholder Power to Nominate Board Members

If you own stock in a company, you may very well have just gotten a lot more powerful. As expected, the Securities and Exchange Commission today used powers granted to it by the Dodd-Frank financial reform bill to change the rules governing how companies elect their directors, increasing shareholders’ power to effect change in coporate boardrooms.

The rule change, approved by a 3-2 vote, requires companies to include in their proxy materials shareholder nominations for the board of directors under certain conditions. Shareholders who have continually owned at least 3% of the voting shares in a company for three years. Shareholders can’t borrow stock to achieve the 3% threshhold.

Commenting on the change, SEC chairman Mary Shapiro said that it’s only fair that long-term shareholders have the right to nominate boardmember candidates and that improved transparency would serve a huge benefit for shareholders.

“These rules reflect compromise and weighing competing interests. As with all compromises, they do not reflect all the views of any one person or group,” Shapiro said.

And she was right about that! SEC Commissioner Kathleen Casey said the rule is “fundamentally and fatally flawed, and it will have great difficulty surviving judicial scrutiny.” Casey, along with Troy Paredes, voted against the measure. Both are Republicans. Companies tend to oppose the rule, fearing that short-term investors will use newfound power to harm companies’ long-term interests. Labor unions and pension funds have been agitating for the change, saying that companies are insufficiently responsive to shareholder interests because it’s hard to vote out incumbent board members.

SEC Expands Shareholder Power to Nominate Board Members