On Nov. 28, the Securities and Exchange Commission missed an opportunity to find a middle ground on proxy access.

That day, Chairman Christopher Cox joined with the SEC’s two other Republicans in a 3-1 vote to approve an amendment to Rule 14a-8(i)(8) to allow companies to resume omitting proxy access proposals from shareholders. The Republican majority approved this “non-access” rule even though it was opposed by more than 95 percent of the nearly 9,000 comment letters submitted to the SEC. While Cox said the rule was needed to prevent legal uncertainty and possible fraud, the rule change has angered many public pension funds and labor investors and likely will generate more litigation.

Although Cox said he hopes the agency will revisit the issue in 2008, investors and Commissioner Annette Nazareth, the SEC’s lone Democrat, are skeptical that the agency will want to again debate the question of whether shareholders should have the ability to nominate board candidates to appear on management proxy statements.

Regardless of one’s views on the merits of proxy access, both investors and companies would have been better served had the SEC found some way to allow shareholders and issuers to continue to express their views on the issue.

Investors already have shown that they are willing to vote for well-crafted access proposals. During the 2007 proxy season, access proposals won 53.4 percent of votes cast at small-cap Cryo-Cell International and received at least 43 percent support at UnitedHealth and Hewlett-Packard. In the RiskMetrics Group’s 2007 Policy Survey, which was conducted prior to the commission’s Nov. 28 vote, two-thirds of institutional investor respondents said they support proxy access at all U.S. companies.

Until recently, Cox, a former lawmaker, had been widely praised by both Democrats and Republicans for his ability to achieve consensus on thorny issues. In contrast to his immediate predecessor, William Donaldson, who presided over several high-profile 3-2 votes, Cox has obtained unanimous commission support for new rules on executive compensation disclosure, electronic shareholder forums, and other issues.

Given his reputation, it’s unfortunate that Cox didn’t broker a compromise on proxy access or take other steps to promote board accountability. With some creativity, the commission might have obtained a compromise that would have allowed investors and companies to continue to express their views on proxy access, while addressing the Republican majority’s concerns about avoiding legal uncertainty or potential fraud.

For instance, the SEC could have adopted a rule of limited duration (e.g., that would apply to corporate meetings until Dec. 31, 2008, or Dec. 31, 2009) that would permit investors to file only non-binding access proposals. Since these proposals would be non-binding, companies could not be forced to adopt a potentially problematic access bylaw and accept shareholder nominees in 2009 without sufficient safeguards. While some investors prefer to file binding bylaw proposals, most of them presumably would prefer to get a non-binding resolution on the ballot than nothing at all.

While some companies, judges, and law professors have criticized non-binding proposals, many investors believe that they are an effective, less-prescriptive way to let shareowners and companies debate issues and to customize an approach that works best for the firm’s particular circumstances. This happened during the debate over majority voting in director elections. After non-binding proposals won widespread shareholder support in 2005, companies responded by adopting director resignation policies, and later, many firms approved majority voting bylaws. This company-by-company approach would be especially appropriate for proxy access, given the widespread corporate opposition to the SEC’s 2003 draft rule on proxy access that would have applied to all public companies.

Of course, a company can still decide on its own to put the issue on its proxy statement. CEO Warren Buffett took this enlightened approach during the 2007 season when he allowed Berkshire Hathaway investors to vote on a Sudan-related resolution even after the company obtained SEC permission to exclude it.

Allowing non-binding proposals on corporate ballots in 2008 would enable investors and issuers to continue to debate the issue--without the risk of fraud or wasteful litigation. If the proposals received wide support, companies would know that proxy access is an issue that is important to mainstream investors. Boards could then sit down with the proponents to craft a balanced access bylaw that would require a meaningful minimum (e.g., 3 to 5 percent) ownership stake, a sufficient holding period (e.g., two to three years) to deter short-term investors, and sufficient disclosure about the nominator’s ownership and intentions.

If the access proposals fared poorly, the American Federation of State, County, and Municipal Employees, the California Public Employees’ Retirement System, and other access proponents presumably would stop filing those resolutions and move onto other governance issues that have broader support.

Alternatively, the SEC could have adopted a rule to address its disclosure concerns without barring access proposals completely. The agency could have amended Rule 14a-12(c) to clarify that investors who make director nominations pursuant to an access bylaw must also file a Schedule 14A detailing their ownership, background, and solicitation efforts. While some investors have objected to placing new disclosure obligations on anyone who simply files an access proposal, it’s in the best interests of both investors and issuers to require disclosure from shareholders who take the additional step of proposing board candidates.

The SEC also could have lessened the outcry over proxy access by taking another meaningful step to enhance board accountability. Most notably, the commissioners could have agreed to seek public comment on the New York Stock Exchange’s proposal to bar the counting of uninstructed broker votes in uncontested board elections, a practice that the Council of Institutional Investors has described as “legalized ballot-box stuffing.”

The rule change, first proposed by the NYSE in October 2006, would make “vote no” campaigns more effective. This reform is increasingly critical as more companies adopt bylaws and policies to require director candidates to receive a majority of votes cast. Progress by the SEC on this issue would have helped diminish some of the bitterness among access advocates over the new rule, which the AFL-CIO described as a “partisan” attack on investor rights.

With such a step or a compromise on proxy access, the SEC could have reassured investors that the agency still is willing to take meaningful steps to promote board accountability.

This commentary expresses the views of the author alone and does not purport to represent the views of RiskMetrics Group or its clients.