The Securities and Exchange Commission approved a new corporate rule this week that may help shareholders oust directors of corporations that are underperforming. The rule allows for certain shareholders to list their own board nominees on a proxy ballot along with candidates that are supported by the company's management. The proxy ballot is mailed by the company.

Previously, shareholders have been responsible for sending their own mailings, which is a process that requires much time and expense.

The rule provides the right to place candidates on the company's ballot to a shareholder or group of shareholders who hold at least three percent of the company's stock for at least three years. However, this rule will not apply to smaller companies, as defined by SEC rules, for three years.

Shareholder advocates, labor unions and public pension funds, among others, supported the SEC's approval of the rule. These backers believe the action will provide shareholders with more leverage to force needed changes in underperforming companies and help to deal with excessive compensation for executives.

However, the rule's opponents argue that the rule will provide too much power to unions looking for bargaining leverage. Likewise, many big corporations pointed out that activist hedge funds could propose directors focused only on creating short-term profits, essentially holding the corporation hostage.

The SEC was divided on the rule, which was approved by a 3-2 vote. The commission's three Democrats voted for the rule, while its two Republicans opposed the rule.

Some corporate law attorneys believe that this rule will not be very disruptive, mainly because shareholders must own at least three percent of the company's stock for at least three years before they are entitled to nominate their own candidates. Essentially, the shareholders must have a lot of stock and a lot of money before there would be a concern for companies.

The rule will take effect in about two months. 

Source: Los Angeles Times "Shareholders get new access to proxy ballot process" 8/26/10