In early May, the Securities and Exchange Commission took up the hot-button issue of shareholder democracy when it held the first of three roundtables on federal proxy rules and state corporation law. Based on that agenda, it appears that the SEC is taking a broad approach to corporate governance and shareholder voting, and not limiting itself to the narrow issue of nominating directors, as some had thought it might, says Mark Borges, a principal at Mercer Human Resources Consulting. "It suggests to me that [the SEC] recognizes that this issue needs to be fixed in the broader context of other things that might be wrong with the voting process," he says.

Borges believes that in five years, majority voting for directors will be the standard. But he is less certain as to whether that step alone will address the governance issues or whether shareholders will still want or feel the need to treat director elections as a legitimate election, rather than one in which they hold a veto power over management candidates. "We're in an environment where shareholders believe that this is sort of like Congress: 'I elect the directors and the directors should be telling management what to do.' That's probably not the case in every area, but certainly in hot-button areas like executive pay."The SEC roundtables were the result of a ruling in the fall of 2006 by the U.S. Court of Appeals for the Second Circuit. The court held then that Rule 148-A requires a company to include a proposal to amend the bylaws to permit, in certain circumstances, the inclusion of shareholder nominees in the company's proxy materials. The ruling was a rebuke of a long-standing SEC policy that allowed companies to exclude shareholder proposals seeking direct access to the proxy statements–and a huge leap forward to those shareholders seeking to elect directors more responsive to their concerns.

The proxy rules issue is a live wire, Borges remarks, since it's not clear whether these are corporate issues that need to be satisfied at the state level or disclosure issues open to federal regulation. Says Borges: "I suspect that if some business organizations are not satisfied with what the SEC does, there's always the possibility that they could sue [the SEC], saying: You've exceeded your authority.'"

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