Could Investors Shake Boardrooms?

Among the deficiencies that led to the global financial crisis, weak strategies of corporate boards have been a major one. This could probably have been avoided, had more investors been allowed to place their director nominees.

In an effort to address the flaws of managing companies by having more efficient corporate boards, the Securities and Exchange Commission (SEC) is going to decide today whether to make shareholders the kingmakers by giving them greater power to nominate corporate board directors. This was reported by Reuters earlier today.

Proposing director nominees by shareholders on the corporate proxy statement has been a must since the financial tsunami of 2008. This regulation was primarily a fallout of the protests of shareholders, who wanted their preferred representatives to oversee their investments prudently.

Following the U.S. Treasury’s $700 billion Troubled Asset Relief Program (TARP), which was created to rescue the nation’s financial industry, the demand for such proxy access significantly increased as billions of dollars in taxpayer funds were used to bail out financial giants including American International Group (AIG - Analyst Report), Morgan Stanley (MS - Analyst Report), Bank of America (BAC - Analyst Report), JPMorgan Chase & Co. (JPM - Analyst Report), Wells Fargo (WFC - Analyst Report), Goldman Sachs (GS - Analyst Report) and Citigroup (C - Analyst Report).

Many of these bailed-out financial institutions have substantial overseas operations. As a result, the rescue funds indirectly helped many big foreign financial institutions based in France, Germany, Canada, Britain and Switzerland. Though the U.S. government failed to provide clarity about whom the money was actually bailing out besides the U.S. companies, the boards of these U.S. companies could have protected the taxpayers’ funds. With proper information from the boards of these big companies, the government might have been able to claim some of the cost-sharing from those countries.

For companies still shouldering TARP debts and the consequent governmental interference, the decision-making ability remains restricted. As per banking regulators, if the government withdraws its support from banks before giving them sufficient time to restore their financial health, the sector will face another collapse.

According to Reuters, the SEC will consider providing shareholders a 3% holding of the company's stock for a minimum period of three years in order for them to be able to nominate a director. Also, companies with less than $75 million in market capitalization could be given a three-year allowance to comply with the proxy access rule. However, the plan is not final and could change before the SEC meeting scheduled later today.

The SEC had tried to adopt proxy access rules previously, though in vain. With the backing of the Dodd-Frank financial regulation bill, which affirms the agency's authority to adopt proxy access rules, its chances of increasing shareholders’ influence on corporate boards now look brighter.

Conclusion

But would this increased investor involvement be a big help? Probably not. Not all investors would be involved in placing director nominees, only a few protesting shareholders would participate in the proxy access. The unevenness that the SEC is trying to iron out could, therefore, still remain. However, this will help address the weak strategies of corporate boards to some extent.

Read the full analyst report on AIG

Read the full analyst report on MS

Read the full analyst report on BAC

Read the full analyst report on JPM

Read the full analyst report on WFC

Read the full analyst report on GS

Read the full analyst report on C