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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 director candidates.

"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, a website that advocates corporate governance reform.

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 nominee.

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 "I expect we will do that in the near future but may take a while to sort out some of the [details]."

The week 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 (BK), Eastman 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 directors.

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 jurisdiction."


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