Board representation has become the corporate governance issue of our time. The SEC's director nomination proposal is dead, but shareholders have taken the battle to the streets. Majority voting provisions recently have been adopted by Dell, Intel, and other firms, and shareholders will vote on such provisions at additional firms in the coming proxy season. AIG is currently battling a proposal that would allow shareholders to adopt a director nomination bylaw. And tomorrow GM's board of directors will meet to consider granting a board seat to Jerome York as Kirk Kerkorian's representative.
About five years ago, I floated an idea to a number of corporate law professors about amending the SEC's proxy rules to allow for shareholder nomination of directors. This was long before the SEC issued its doomed director nomination proposal, and response to my nascent idea was entirely negative. "Why would shareholders want to elect a minority of the board?" Under this view, director elections either were about changing control of the corporation or they wouldn't happen.
If recent events have taught us anything, they have taught us that shareholders want more influence over board composition ... and not only the sort of influence that shifts outright control. In my view, this is a positive development in manager-shareholder relations, even though I expect the transition to be bumpy. The most common objection that I have heard from directors is that shareholder nominees have the potential to destabilize the board. If you can get past your initial incredulity at this claim -- "Doh! That's why we want them!" -- you will recognize an important assertion about the nature of boards. The assertion is that board's work as teams, and shareholder nominees are the corporate equivalent of Terrell Owens.
Expect some bad results along with the good. And lots of fodder for future research!
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