The Securities and Exchange Commission and Corporate Democracy

On April 28th of last year, the Securities and Exchange Commission announced it would begin a comprehensive re-examination of the shareholders role in corporate governance. After receiving close to one hundred and fifty letters of comment, the Commission commenced hearings on September 29th in Washington D.C. Few issues are so worthy of the Commission's concern. Under state corporation law, shareholders have the power to nominate and elect members of the board of directors. Today this power is virtually meaningless in publicly held corporations.

The vast majority of shareholders vote by proxy. But neither state nor federal law guarantees shareholders access to the corporate proxy machinery. Instead, incumbent management is allowed to use corporate funds to solicit proxies on their own behalf while all other shareholders must pay for proxy solicitations for their nominees out of their own pockets. The result is that only incumbent management can afford to make nominations.

This is a very serious development for our competitive capitalistic economy. Both the market and shareholders lack an electoral mechanism to replace incompetent, dishonest, or self-dealing directors with more diligent, honest, and loyal representatives.