Commentary: Bring Democracy to Boardroom Elections

By Lewis Braham

Americans like to believe we have shareholder democracy. The people who own a company have a say in how it's run. Right? Well, just try to win a seat on a corporate board without management backing. A tangle of rules and procedures stifle all but the wealthiest and most persistent voices.

Technically, all a dissident candidate needs to do to get on the ballot at an annual shareholder meeting is register with the Securities & Exchange Commission and the stock exchanges. But since most investors vote by mail, the wannabes need to get the word out. And that's when the problems begin.

Candidates can use the media or call shareholders, but the most effective campaign tool is the proxy ballot, essentially an absentee ballot.

Here management has it made in the shade. They mail theirs at shareholder expense. Opponents must print, mail, and pay for their own under SEC rules. Most serious dissidents pony up. But money is a real deterrent. A proxy costs about $2 per shareholder--millions for a sizeable company. Imagine a country where the "challenger has to pay for his campaign out of his own pocket, while the incumbent uses the government's treasury," says Guy Adams, managing director of GWA Capital Partners, a Los Angeles-based money manager. "You'd say what a banana republic this is."

The proxy ballot is key to another issue: The exchanges' arcane rules on broker votes. Even if a dissident has registered, brokers can vote shares of clients who don't return ballots as long as those investors never received a separate proxy from dissidents. In such cases, brokers usually vote with management to keep on a potential customer's good side. "In my experience, brokers always vote their uninstructed shares with corporate management's recommendations," says William A. Marsh, president of IVS Associates Inc., which tabulates proxy votes.

Broker votes were the nemesis of New York-based Privateer Asset Management, a small money manager, and its shareholder-rights affiliate, eRaider. In 2001, the two ran three candidates for the board of Goldfield, an American Stock Exchange-listed electrical construction and mining company in which Privateer has a 1% stake. They didn't mail a ballot because of the $25,000 cost, but they say the company spent $450,000 fighting them. Goldfield won by a large margin--21 million to 10 million--but brokers cast over 9 million votes, estimates Deborah Pastor, a director at Privateer and eRaider who was one of the candidates. David Bicks, a partner at LeBoeuf, Lamb, Greene, & MacRae, which represents Goldfield, says investors rejected raiders who "just want a short-term move in the stock." Nonsense, says Pastor. "If you take out the broker votes, we were very close."

The SEC and the exchanges can and should fix these problems. All candidates should appear on the ballot that companies prepare. After all, they already print dissident shareholder proposals in proxy statements. Then, companies should set up funds to cover all candidates' costs of ballot mailing, legal counsel, and shareholder solicitation. But cap the funds to discourage abuses and wasteful proxy wars. Finally, brokers should no longer be able to vote clients' shares in board elections. Industry representatives argue that brokers assure a quorum, since individual investors rarely return proxy ballots. Fine. Let their votes count for a quorum, but not to elect directors.

The Council of Institutional Investors, a pension-fund trade group, and CorpGov.Net, a shareholder activist group, both support such changes. Critics counter that they would foster crackpots. That's easy to fix: Require candidates to have a certain number of shares behind them.

Many of the corporate abuses emerging now happened under crony boards. It's in everyone's interest to make it easier for outsiders to get in.

Braham covers investing in New York.

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