US regulator challenged: scrap plans that limit investor influence on Boards

The US Securities and Exchange Commission (SEC) could miss a great opportunity for improving shareholder rights in the US if it goes ahead with proposed rules that would limit shareholders' ability to have a say in the composition of company boards.

Over the next few days the SEC will determine the rules of the game in 2008 for shareholders that wish to nominate directors to the proxy. Two proposals released earlier this year attracted criticism from some of the world's largest shareholders, including F&C. The first of the proposals includes a 5% threshold for amending the company board nomination process or nominating candidates, which F&C believes to be too high for the US market where corporate ownership lacks concentration. The second proposal would, among other things, eliminate shareholders' right to file non-binding shareholders proposals. F&C believes shareholder proposals serve an important function in the US in encouraging management to adopt best practice in managing governance and sustainability issues. Last week, SEC Chairman Chris Cox indicated that, following significant criticism, the commission may abandon both proposals and pursue a more limited proposal that has yet to be disclosed.

Back in October, F&C sent a letter to the SEC highlighting its opposition to these proposals, warning they could further damage shareholder rights in the US – which already are far more limited than those in the UK or other developed markets.

Karina Litvack, Head of Governance and Sustainable Investment (GSI) at F&C, said: "The precatory shareholder resolution process is crucially important for facilitating communication between owners and companies and therefore we oppose any final SEC proposal that curtails this avenue without a substantial and fundamental strengthening of shareholders rights in those areas."

Litvack believes the SEC should take steps to enhance shareholder access to the board election process in an effort to address the lack of accountability currently embedded in US board election regulations. "Serious shareholders should have an effective mechanism for ensuring that their interests are more fully represented on boards that does not require aggressive and expensive take-over attempts. Shareholders have an obligation to nominate directors when companies are not being properly run – and they need a practical process to do so."

Regarding the 5% threshold, Litvack believes that "while a similar threshold can work well in the UK, it would prove meaningless in the US where even the top 20 public pension funds together can't muster this level of holding among large US companies."

She welcomed the efforts by the SEC to improve communication between boards and shareholders by using electronic tools such as forums, chat rooms and emails. "However, we don't believe an electronic discussion can replace a structured process of voting on management and shareholder proposals at the annual meeting."

Over the last few days some of the largest investors in the US and Europe have made public their opposition to the ruling to convince the SEC to scrap these proposals.