Like cicadas, debates about corporate governance pop up periodically with a great deal of whir and buzz. In 1992, for example, the business community protested Securities and Exchange Commission Chairman Richard C. Breeden's push for changes in such things as the way corporate boards explain some of their decisions to their investors. Today's SEC chief, William Donaldson, is also under fire, over a proposal to expand ever so slightly shareholders' clout in board elections. The controversy has reached such a pitch that the SEC's normal mechanism for reviewing proposed rules changes seems to be stuck in neutral.
The proposal would allow investors, under certain conditions, to nominate their own candidates for seats on a company's board of directors. Even though the rule is artfully crafted so that it could be used only in special circumstances, it has triggered a barrage of protests from both sides of the issue: Some business leaders say it goes too far; some investors complain it does too little.
In reality, the proposal falls somewhere in between: It gives shareholders a bit more say in corporate governance but by no means radically changes the way companies hold board elections now. The proposal's greatest virtue may be that it will do a lot to restore investors' faith that they can influence their own companies, while it also will shore up public confidence -- badly shaken by recent scandals -- in the soundness of our corporate system and stock markets.
Currently, company boards control elections. The boards determine the slate of nominees and use company money to mail and process ballots, as well as to promote their own candidates. Shareholders are effectively disenfranchised, because they have only two voting choices: Either check off "yes" for a candidate or withhold their vote entirely. So even if all the investors but one withhold support for a nominee, that one "yes" vote is enough to elect a director. Investors who want to challenge the board-nominated candidates must use their own funds to mount a difficult and costly proxy fight to present their alternative. With such a system, few investors, even big institutional ones, challenge the board's candidates.
Under the SEC proposal, if enough shareholders withhold their vote for a board nominee, shareowners could, the following year, present at least one independent candidate of their own. But the proposal places so many conditions on when investors could use this "direct access" that it wouldn't apply very often.
Even so, business leaders, think-tank commentators and editorialists are blasting the SEC's proposal as extreme, unnecessary and even dangerous. Some say that the plan would allow fringe groups to hijack company elections and that it risks turning every election -- even at well-run companies -- into a divisive contest. Still others say that overall corporate governance has been improving so steadily, thanks to other recently adopted reforms, that this new proposal is overkill.
These arguments miss the point: The rule is aimed at companies that haven't been run well or that remain deaf to investors and may even have a dismal balance sheet to show for it. Badly run companies just don't get it -- and won't -- unless shareholders have a way to get a board's attention and exert a little extra pressure to change directors' attitude.
Studies have shown that corporations that listen to their shareholders when making decisions tend to have higher value, more profit, greater sales growth and lower expenditures. That suggests that successful companies already are listening to their investors and needn't worry about a shareowner challenge.
Fears that the rule would spark unnecessary shareholder initiatives overlook a simple fact of economics. The major institutional investors, such as pension funds and mutual funds, want corporate managements to build their businesses. They aren't interested in saddling companies with nuisance petitions and shareholder initiatives. These big investors, who represent millions of individuals, can't afford to undermine the success of those companies, because their own investors have so much at stake. That helps ensure that these shareholders would use the direct-access rule as a last resort against boards guilty of misconduct or willful arrogance. Investors have the right to that last resort because, after all, they -- not the management or boards -- own the companies.
Perhaps most important, even well-run companies ultimately will benefit from this SEC proposal in a critical way: When investors feel they exercise more control over their own companies' direction, their confidence can only improve public trust in our institutions and add muscle to our traditional corporate governance system.
The writer is chairman and chief executive of TIAA-CREF, an investment firm specializing in teacher pension funds.