Plan Would Make It Easier to Elect

The Securities and Exchange Commission plans to propose rules tomorrow intended to make it easier for shareholders to elect their own representatives to corporate boards of directors.

The proposal -- pushed by investor activists and opposed by business executives -- would require ballots sent out by companies to list, under certain circumstances, in addition to management's nominees, as many as three directors proposed by shareholders. The aim is to make poorly run companies more responsive to owners by, as SEC Chairman William H. Donaldson has put it, helping ensure that the board of directors "hires a chief executive, not the other way around."

While the SEC has not made the proposal public, many of its details have leaked out over the past 10 days, sparking renewed debate over whether the new rules represent a change that is too severe or not far-reaching enough. But most supporters agree that, if adopted as planned within a few months, the proposal would give investors limited but significant new opportunities to change how corporations are run . Shareholder activists have sought such power, calling it necessary to curb abuses in corporate America, including excessive pay packages for corporate chiefs and directors who fail to look out for shareholders' best interests.

"I don't know if it's the perfect approach, but I think it's a legitimate attempt to give investors more say," said Barbara Roper, director of investor protections at the Consumer Federation of America, a nonprofit advocacy group.

Under current rules, shareholders can walk into an annual meeting and nominate someone for a director's seat, but such efforts are unlikely to succeed because most shareholders vote by mail before the meetings. That leaves dissatisfied shareholders with two choices -- withhold their votes or wage costly, time-consuming campaigns for their board candidates. Under the proposal, investors would be able to take one of two additional paths, according to SEC sources familiar with the proposal:

• A group representing at least 1 percent of a company's investors could put a proposal on the proxy ballot requesting that a shareholder nominee or nominees be added to the ballot the following year. The proposal would need the approval of more than 50 percent of shareholders to win.

• Or, if 35 percent of shareholders withhold their votes for a director or slate of directors, it would trigger a provision giving investors the right to try to get nominees on the next year's ballot.

Either way, SEC officials say, investors would have signaled a "no-confidence vote" in management and its nominees.

Next, investors would have to win backing from 5 percent of shareholders to submit nominations. Shareholders would be allowed to propose one name for smaller boards and as many as three for larger ones. Nominees would have to get more than 50 percent of the vote to win.

Evelyn Y. Davis, a shareholder activist for 40 years, worries that smaller shareholders will be denied equal influence. "It's outrageous discrimination," Davis said, adding that it is almost impossible for an individual investor to garner 5 percent of shareholder votes.

Officials at the Business Roundtable, an organization representing chief executives of the country's largest companies, say the proposed change goes too far. Access to the nomination process would allow small groups of shareholders to cause substantial increases in "cost" and "disruption" of other investors, they said. They said they worry that boards would be paralyzed by a few dissidents or individuals obsessed with one issue.

The Business Roundtable might consider challenging a final rule in court on the grounds that such issues should be left to the states, much as it challenged an attempt by the SEC in the late 1980s to give shareholders more clout, industry sources say.

Donaldson has said repeatedly that the SEC will make sure safeguards are in place to prevent the rules from being used to mount a takeover of a company or from upsetting the mix of expertise and backgrounds some corporations strive to create on their boards. He has also said the rules would be written to avoid conflicts with state laws.

Nell Minow, editor of the Corporate Library LLC, a corporate governance consulting group, said corporate abuses that have shattered investor confidence might have been avoided or uncovered earlier if directors had been more independent and aggressive in questioning management.

She and others have said that just the possibility that shareholders could more easily nominate directors would make many board members act more responsibly. "It's time for management to nominate better directors. Then shareholders wouldn't have to do this," Minow said.

Some investor groups, however, including a coalition of state public pension fund managers, have said they worry that the SEC proposal does not go far enough and puts too many hurdles in front of shareholders. Some say they would welcome a public fight if the Business Roundtable challenges the SEC's right to give shareholders a greater voice in selecting directors.

"I would feel very comfortable trying in North Carolina to successfully pass legislation that would require a corporation that does business here or is incorporated here to honor a majority vote of shareholders on all issues," said Richard H. Moore, treasurer of North Carolina.

The SEC has considered similar proposals since the 1940s, most recently in 1977, but has never acted.