The Securities and Exchange Commission in USA proposed rules Wednesday that could strip away some of the power that CEOs have to control how board members are nominated.
While none of the five SEC commissioners who voted in favor of the proposals shouted ''Viva la rvolution!'' the measures, if adopted, would constitute a radical shift in the way independent directors are chosen.
Currently, the CEO has nearly unlimited power to nominate people to serve on the board of directors.
Shareholders who vote by proxy ballot on those nominations see only the names of candidates backed by management.
If a dissatisfied group of shareholders wanted to nominate an outside candidate, the group would have to send out its own material to shareholders, urging them to write in the name of the outside candidate on the proxy ballot. For most people, the cost of such a mail campaign would be daunting.
Under the SEC's proposed rules, management would have to include the names of certain outside candidates on its own proxy materials when one of two ''trigger'' events occurred:
* If 35% or more of shareholders voting for a slate of directors withheld their votes for one or more management-backed directors.
* If a proposal to force management to include outside candidates for its board of directors received more than 50% of the proxy votes cast in a particular year.
SEC Chairman William Donaldson says the proposed rules ''would strengthen the proxy process, directly benefiting shareholders, while carefully and thoughtfully balancing concerns about proper management and operation of our public companies.''
While the SEC wants to democratize the process by which directors are nominated as candidates for corporate boards, it doesn't want to allow corporate raiders to use the rules as a way to seize control of corporations.
The Business Roundtable, an association of CEOs of major corporations, opposes the proposed rules. John Castellani, president of the association, argues that the Sarbanes-Oxley Act, along with a flurry of new rules from the SEC and the New York Stock Exchange, have already improved how companies nominate independent directors.
''We think it's working,'' says Castellani. ''We think it will result in better corporate governance and minimize the chances of repeated scandals.''
Castellani declines to say whether his group would take legal action against the SEC if the proposed rules weren't tempered to the Business Roundtable's satisfaction, but he won't rule it out.
Nell Minow, a shareholder activist who serves as editor of The Corporate Library, says the proposals don't go far enough.
''A lot of reform efforts have focused on independent directors,'' she says. ''But there's no such thing as independent directors as long as management is picking all of the directors. The greatest benefit of this rule change, if it goes through, will be that management will have to hesitate before rounding up the usual suspects.''
