The Securities and Exchange Commission on Wednesday handed labor and social-activist groups a big victory by approving rules making it easier for them to put allies on corporate boards throughout the country.
The measure was approved on a 3-2 vote by a divided commission, with Republican members warning that the change may not pass muster in the courts. It is the first major regulation from last months landmark financial-reform law to win approval.
Business groups insisted that the measure will damage corporate decision-making by bringing fights over politics and radical social agendas into the boardroom. But shareholder groups said it merely gives them minimal rights that investors in other developed countries already have.
AFL-CIO President Richard Trumka called the approval a “historic step in empowering long-term investors” and added that the labor federation has sought the change for “close to 70 years.” Labor groups funneled millions of dollars into a campaign to enact the financial-reform measure, in part to secure the new rules.
“Universal proxy access is a fundamental shareholder right enjoyed in most developed nations around the world, so we are very happy to see the United States achieve parity on this,” said Lisa Woll, chief executive of the Social Investment Forum, which pushes for “socially responsible” and “environmentally sustainable” investments by businesses.
But Larry Burton, executive director of Business Roundtable, said that for the 12,000 publicly traded corporations affected by the SEC’s ruling, it adds regulatory burdens, controversies and uncertainties that businesses and the economy can ill afford as they struggle to recover from the recession.
“It not only expands the role of the federal government, it increases business uncertainty and costs,” he said, adding that the ruling “will allow special-interest groups to pursue narrow agendas and exacerbate the markets short-term focus.”
SEC Chairman Mary Schapiro, who was appointed by President Obama, said the rule was needed to ensure basic fairness and accountability among corporations and executives that have used existing rules to burnish their profits, pay and perks while often leaving shareholders holding the bag when their corporate strategies go sour.
The rule allows shareholders that have held at least 3 percent of a company’s stock for at least three years to nominate members to the board of directors and include their candidates in the proxy materials sent to investors prior to board meetings.
“Nominating a director candidate is not the same as electing a candidate to the board,” said Ms. Schapiro. “I have great faith in the collective wisdom of shareholders to determine which competing candidates will best fulfill the responsibilities of serving as a director. To me, the critical point is that shareholders have the ability to make this choice.”
Ms. Schapiro sought to defuse business opposition by including safeguards, such as barring corporate raiders and other investors from using the mechanism to try to change control of the company and prohibiting them from borrowing shares to meet the 3 percent ownership requirement.
While the change will be in place in time for next spring’s corporate election season, the SEC sought to allay concern among small-business groups by putting off enforcement of the ruling for three years for 5,000 small companies with market values of $75 million or less.
Those attempts at softening the ruling did not satisfy the U.S. Chamber of Commerce, which called it “a giant step backwards for average investors” and vowed to keep fighting it in every venue.
The two dissenting Republican commissioners warned that the measure treads on the traditional rights of states to govern businesses that incorporate within their borders, and thus may be vulnerable to a court challenge.
Commissioner Kathleen Casey said the ruling favors large institutional shareholders over small investors and is “so fundamentally and fatally flawed that it will have great difficulty surviving judicial scrutiny.”
Blake Hornick, a corporate lawyer at Seyfarth Shaw LLP, said the ruling in combination with other recent SEC actions and a financial-reform measure guaranteeing shareholders a vote on executive-pay packages represents “a shift of control in part from directors and management to large, activist shareholders.”
The newly empowered investors “may or may not have the corporation’s long-term best interests at heart,” he said. “It remains to be seen whether this is a good development.”