Federal regulators are reviewing the process by which public company shareholders exercise their votes and said Wednesday they may change the rules to make the system more transparent.
The Securities and Exchange Commission took a step toward that goal by voting to issue a document raising questions about the corporate proxy system and seeking public comment on it. The document also raises questions about the accuracy and transparency of the voting process, and whether some practices by professional investors can improperly influence voting results.
The SEC review comes at a time when investors, hurt by the financial crisis, are angry about extravagant compensation packages for executives and want more say over how much they are paid.
The agency is seeking public comment for 90 days on the document, called a concept release.
The review also touches on the role of proxy advisory firms, which make recommendations to shareholders on how to vote on electing company directors or on policy matters for companies. Some companies and investors have raised concerns that the firms may be subject to conflicts of interest or may base their recommendations on erroneous information.
The agency hasn't made a comprehensive review of the proxy system in 30 years, SEC Chairman Mary Schapiro said at a public meeting. Since then there have been many changes, she noted, such as technology, shareholder demographics, the structure of share holdings and the potential economic significance of each proxy vote.
With more than 600 billion shares being voted each year, the proxy system "is an integral component of our country's corporate governance," Schapiro said. The process must be "timely, accurate, unbiased and fair," she said.
Another question raised is whether the practice of so-called "empty voting" — when a shareholder's voting rights greatly exceed its economic interest in the company — is used to improperly influence results. The practice can occur, for example, when a shareholder buys an option to sell his shares in the company but keeps voting rights on the shares.
The SEC also is looking at ways of improving the information flow to shareholders, such as enhancing the use of the Internet for distributing proxy materials before shareholder meetings.
"We are pleased the SEC is opening up this discussion, as our shareholder proxy voting system is decades old and needs to be updated and reformed," Jeffrey Morgan, president and CEO of the National Investor Relations Institute, said in a statement. "This is a unique opportunity for investors, (companies) and all involved to come together to develop a better system."
The agency, meanwhile, has put off issuing rules making it easier for shareholders to nominate company directors, a change sought by investor advocates and opposed by business interests that has divided the SEC commissioners along party lines.
The panel, split 3-2 with Democrats in the majority, proposed the rule change in May 2009. The move to final approval was originally planned for sometime last year but was delayed.
Under the current system, dissident investors must wage costly proxy fights and appeal to shareholders at their own expense if they seek new directors on a company's board or a bylaw change.
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