US investors closer to breaking down the boardroom doors

Shareholders are pushing for new powers to hire and fire directors at US companies, in a move that could revolutionise corporate governance and usher in an era when contested boardroom elections are common.

Plans to allow investors to nominate their own rival candidates to an entrenched board have shot to the top of the agenda ahead of the spring season of annual shareholder meetings, which kicks off this week at Hewlett-Packard, the computer manufacturer.

The aim is to make directors fearful for their jobs, and therefore keener to respond to the concerns of investors.

HP and other companies are being asked to allow long-term shareholders to suggest their own candidates to stand on the ballot alongside the board's own candidates, avoiding the need for a vicious and costly battle to impose a new board from outside.

Although the companies are vigorously opposing the moves, corporate governance campaigners believe the upswing in shareholder democracy is unstoppable.

The new campaign comes on the heels of last year's successful push to end Soviet-style elections, where withheld votes were not counted and directors could be re-elected even if the only vote they received was their own. A wave of companies adopted rules that said candidates should win at least 50 per cent of votes cast, raising the possibility that they might fail to be elected.

This year's battle to allow shareholders to propose alternative candidates is the logical next step, according to Richard Ferlauto, director of pension and benefit policy at AFSCME, which represents public-sector pension funds. It could, he said, encourage executives to improve their own behaviour, reducing strategic blunders and driving out excessive boardroom pay.

"The idea is that by having this power, we would need to wield the power only infrequently," he said. "It is about improving the rights of shareholders, which are significantly less advanced in the US than they are in Europe. In the UK, it takes just 10 per cent of shareholders to force a special meeting that can replace the whole board, but it isn't used very often."

Unseating entrenched boards is a long and costly business, usually beyond the means of long-term institutional shareholders. Such "proxy battles" require rebel investors to fund and organise their own ballot of shareholders.

These have been on the rise in recent years, with characters such as the veteran investor Carl Icahn trying to force his way on to the boards of Time Warner, Motorola and other companies. However, they remain the preserve of hedge funds, able to put up the millions of dollars such a campaign costs in the expectation of winning a sudden jump in the share price.