Securities and Exchange Commission Chairman William H. Donaldson yesterday decried the "escalating, shrill, and fearful rhetoric" surrounding the most controversial issue on the agency's agenda this year.

Donaldson, in a speech to corporate directors meeting at Stanford University, said critics on both sides of a pending SEC proposal that would allow dissatisfied shareholders to propose their own candidates to corporate boards under limited circumstances have "gone well beyond the bounds of thoughtful and sensible comment." An advance copy of the speech was given to The Washington Post.

The last time the SEC considered changes to the way board members are elected, in 1977, business lobbyists batted down the rules. Experts said it could be the single most important step the SEC takes to alter the way companies are governed in the aftermath of devastating corporate scandals.

The Business Roundtable staunchly opposes the current proposal, arguing that it would render corporate boards susceptible to a takeover by special interest groups. The U.S. Chamber of Commerce has vowed to sue if the SEC approves the original plan, which would allow investors to nominate their own board candidates if 35 percent of shareholders withheld their vote from a sitting director or a group of directors.

It remains unclear where the agency will come down on the issue. Donaldson has been struggling privately for weeks to craft a plan that would win the votes of at least three of the five SEC commissioners needed to approve the plan.

Two Democratic commissioners are rejecting one possible compromise that would put power in the hands of corporate board members to offer up alternative candidates if a majority of shareholders withheld their votes from a current director. Instead, they argue, the power to suggest alternates should lie with the dissatisfied shareholders.

The issue has spawned tough op-ed articles and a fierce display of lobbying by both sides in the run-up to the presidential election, which Donaldson indirectly referenced yesterday.

"Let's not mock those who struggle to find this middle ground," he said. "And let's not proclaim the end of American competitiveness if any such middle ground were found."

Industry observers said the SEC needs to act soon to ensure that any changes to the way board elections are conducted would be in place for the 2005 proxy season.