Although shareholder activism has progressed in recent years, the 2008 financial crisis confirms the need for further changes.1 The legal structure underpinning contemporary American corporate governance has failed shareholders. "[T]here are still problems in exercising basic shareholder rights in many U.S. listed companies, because shareholders often have limited influence over the election of their board members" wrote the chief of the investment arm of Norway's central bank in a letter to S.E.C. Chairman Christopher Cox.2
Two prominent examples, Enron and Lehman Brothers, highlight the status quo's problems. The failure of Enron's board of directors to safeguard shareholders contributed to the company's collapse. In its 2002 report, the U.S. Senate Permanent Subcommittee on Investigations concluded that Enron's board allowed the company:
[T]o engage in high risk accounting, inappropriate conflict of interest transactions, extensive undisclosed off-the-books activities, and excessive executive compensation. The board [also] witnessed numerous indications of questionable practices by Enron management over several years, but chose to ignore them to the detriment of Enron shareholders, employees and business associates.3
There was reason to be optimistic about governance changes in Enron's aftermath.4 The current financial crisis, however, has revealed the extent to which corporate boards of directors continue to fail shareholders. Lehman Brothers' board of directors took a "leisurely approach to overseeing the risk decisions and standards" which led to the firm's September 2008 bankruptcy. Moreover, Lehman's board was "content with a governance structure that concentrated power effectively in the hands of the CEO" and "apparently [saw] no need for a change in its own governance, or that of top management either. It took a bet that its approach would work and it lost big time . . ."5 These episodes illustrate the dangers of inattentive and enfeebled boards of directors.
A director owes a fiduciary duty to the company's shareholders to oversee corporate management.6 Accordingly, shareholders should play the leading role in selecting a board charged with representing their interests. Shareholders elect the board of directors through a proxy card which allows investors to vote without actually attending the shareholder meeting.7 In the rare situations where the current board members have not re-nominated themselves, the only nominees found on the proxy ballot are those chosen by the company's management.8 If a shareholder wants to suggest a nominee for the board election, the shareholder must cover the expense of complying with complex SEC regulations and mail separate ballots to shareholders.9
This process undermines shareholder democracy. In reality, the nomination process for the board of directors is controlled by management. The interests of a director who owes their position on the board to the corporation's executives are in conflict with the company's shareholders.10 The situation is exacerbated when the company's chief executive officer is an influential board member or chairperson.11 A nomination usually results in election since board elections are often uncontested. 12
One prominent shareholder rights advocacy group, the American Federation of State, County & Municipal Employees (AFSCME), urged shareholders to press companies to adopt bylaws which would grant shareholders' board nominees direct access to the proxy ballot. Shareholders nominees would reach all of the company's shareholders without imposing on the shareholder the costs of a potentially expensive proxy battle.13 AFSCME also challenged the interpretation of SEC Rule 14a-8(i)(8),14 which states that a company may exclude a shareholder proposal in the company's proxy statement "[i]f the proposal relates to a nomination or an election for membership on the company's board of directors or analogous governing body or a procedure for such nomination or election", in court. …