Directors of public corporations are nominated and elected each year through a process called “proxy voting.” Nominations for director are listed on a piece of paper called the “proxy,” which is mailed to all shareholders. They usually receive one vote for every share they own. The nominations for directors, however, are not made by the shareholders themselves. Instead, the nominating and governance committee of the board – sometimes in consultation with management – selects the nominees.
In theory the board best knows the specific qualifications and expertise that are required to fill a vacancy. Critics of this system advocate that the rules be changed so that major shareholders be given the right to make their own nominations. This is known as “proxy access.” Rules for proxy access are currently being considered in many countries. In the U.S. this has been assigned to the Securities and Exchange Commission under the Dodd-Frank Bill of 2010.
Why is proxy access important? Advocates of proxy access believe that because the board of directors serves as the representatives of shareholders, shareholders should have the right to nominate their own representatives.
Critics of proxy access believe that a change in the rules would make it easier for activist investors and special interests to gain access to the board. If the board is “co-opted,” it could make decisions that favor the interests of one shareholder or stakeholder group over another and hurt the competitive advantage of the company.