April 01, 2003
The Key to Director Independence: Equal Access to Corporate Board Elections
by William Baue
A growing number of investors are demanding that shareowners be given the right to nominate
candidates for board of director elections.
Most informed investors agree that independent directors on corporate boards should be part of the
cure for U.S. corporate-governance ills. The Sarbanes-Oxley Act has taken a step toward solving
this problem by requiring all publicly traded companies to have a majority of independent directors
within the year.
However, an increasing number of influential institutional
investors and investor groups, such as the California Public Employees' Retirement System (CalPERS) and
the Council of Institutional Investors (CII), are
advocating for the right to nominate directors for corporate board elections. Under current
Securities and Exchange Commission (SEC) rules, only a company's senior management can nominate
"Requiring that a majority of board members be independent does
little since they can still be the CEO's golfing buddies," says James McRitchie, editor of CorpGov.net, a website that advocates corporate
Mr. McRitchie points out several ironies of the current SEC
regulations that govern board elections.
Owners of a corporation do not have the right
to nominate board directors for corporate board elections. If shareowners want to place their own
board candidate on the proxy, they must resort to an expensive proxy contest. The minimum cost of
such a contest is $250,000, and management can empty the corporate coffers to oppose the candidacy.
The height of irony is that a candidate nominated by management needs only one vote to secure a
place on the board of directors, even if an overwhelming majority of shareowners oppose the
Said Mr. McRitchie, "Corporate elections are like elections in the old Soviet
Union--you can vote, but for each opening, there's only one candidate." Mr. McRitchie likes to
quote the February 20, 2003, editorial by Michael Rapoport of the Dow Jones Corporate Governance
Newsletter: "What are executives and directors afraid of? Democracy?"
In August 2002, Mr.
McRitchie confronted these ironies by joining forces with the Committee of Concerned Shareholders to file a rulemaking petition
with the SEC. The petition asks the SEC to require that shareowner nominees for director positions
be included on corporate proxies.
"However, I'm a realist--I know my petition is not
going to be the one taken up by the SEC," said Mr. McRitchie.
Mr. McRitchie correctly
anticipated that stronger voices would join the fray. CalPERS, which manages $131 billion in
assets, voted to file a rulemaking petition with the SEC that advocates allowing shareowners to
nominate board candidates.
More recently, the Council of Institutional Investors, which
represents $3 trillion in assets, voted at its semiannual meeting in Washington, D.C., late last
week on a policy that supports equal access to board candidate nominations.
"We did adopt
the access policy, which is all the authorization we need to go forward with a rulemaking
petition," Peg O'Hara, managing director of CII, told SocialFunds.com. "I expect we will do that
in the near future but may take a while to sort out some of the [details]."
before, CII filed a letter with SEC Chair William Donaldson in support of the shareowner resolution
filed by the American Federation of State, County, and Municipal Employees (AFSCME). The
resolution asks Citigroup (ticker: C) to grant equal
access to board member nominations. AFSCME, which represents pension funds that collectively hold
more than $1 trillion in assets, has filed similar resolutions with AOL-Time Warner (AOL), Bank of New York
Kodak (EK), ExxonMobil (XOM), and Sears (S).
However, SEC legal staff issued Citigroup a "no-action" letter allowing the company to omit the
resolution from its proxy, according to rule 14a8(i)(8), which relates to elections of board
membership. CII supports AFSCME's contention that although the SEC rule disallows resolutions that
relate to a specific nominee, the Citigroup resolution addresses the process of nominating
If the SEC's no-action to Citigroup is any indication of its general attitude
toward equal access to board member nominations, it portends a major struggle between the inertia
of the status quo and institutional investors advocating for corporate governance reform.
"Equal access to board nominations is the holy grail of corporate governance reform," said
Patrick McGurn, senior vice president and special counsel for Institutional Shareholder Services (ISS). "It is an important
goal for investors because it would give them representation on the board, but at the same time it
may be an elusive quest that takes a rather long time because it does involve state and federal