Shareholders Will Flex Some Muscle in Proxy Season

Next spring’s annual crop of shareholder meetings may hold some surprises. That’s when new Securities and Exchange Commission rules giving investors more muscle will be put to the test. It will then be easier for major investors such as pension firms and hedge funds to get rid of directors who are too cozy with company executives.

Some steps have already been approved, and more are coming. In July, the SEC OK’d a measure that prohibits brokers from casting votes on behalf of investors who don’t vote themselves in elections for directors. The ban ends a huge advantage for director candidates backed by management. “Brokers vote almost 100% of the time with management,” says Patrick McGurn, executive vice president at RiskMetrics Group. “So investors started clamoring” to end broker votes.

In addition, later this year, the agency plans to finalize rules that require boards to disclose director qualifications and explain why they are qualified to hold their positions -- a move that will help investors identify weak board members and ensure that board members have relevant experience in a company’s industry. “What we are seeing for the first time in modern history is that shareholders have a meaningful say on who is on a board,” says Stephen Davis, executive director of the Millstein Center for Corporate Governance and Performance at the Yale School of Management.

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Boards will also have to outline how executive pay packages relate to risk. The idea is to give investors a better idea of whether the compensation structure may encourage executives to take undue risks.

As a result of the changes, boards will have to work harder to win shareholders’ confidence and spend much more energy gauging investors’ opinions before meetings. “The big word these days is ‘engagement,’ ” says McGurn. “Chairpersons of key board committees will have to spend more time talking with shareholders to find out the hot button issues.”

Come 2011, another big shift in the balance of power is likely. The SEC will finally get around to giving large, long-term shareholders the right to place their own candidates on company proxy ballots, making it much easier to oust management’s candidates. “We will see more directors losing their seats, particularly in troubled companies,” says Davis. “That would have been extremely rare before.”