On May 19, Senator Charles Schumer of New York introduced sweeping legislation that, if enacted, would significantly change how corporate boards are elected and operated. The bill, the “Shareholder Bill of Rights Act of 2009,” addresses virtually all of the major reforms sought by activist investors during the past decade, including proxy access, advisory votes on compensation, and independent board chairs.

While the Business Roundtable and other corporate advocates are mobilizing against the bill, investor advocates praised its provisions. The Council of Institutional Investors, the California Public Employees’ Retirement System, and the American Federation of State, County, and Municipal Employees quickly endorsed the bill.

“We believe that stronger investor oversight is critically needed to restore trust and confidence in the integrity of the U.S. capital markets,” Joe Dear, CalPERS’ chief investment officer, said in a letter to Schumer. “Your legislation will enhance our ability to be active and prudent shareowners.”

Advisory Votes: The legislation specifically requires issuers to hold a separate advisory vote at every shareholder meeting where executive compensation disclosure is required. This requirement would apply to proxy statements issued more than one year after the effective date of the legislation. (In other words, it appears that pay votes would not become mandatory across the U.S. market until the 2011 proxy season at the earliest.) The bill makes clear that the votes are non-binding, would not overrule board decisions, and would not “create or imply any change in the current fiduciary duties” of boards. Anticipating potential no-action challenges from issuers, the bill states that the advisory vote provision should not be construed to restrict or limit the ability of shareholders file compensation-related proposals. The bill also calls for a separate vote on “golden parachute” compensation arrangements to accompany shareholder votes on mergers, acquisitions, or sales of substantially all of an issuer’s assets.

Proxy Access: The bill directs the Securities and Exchange Commission to establish rules to allow investors to nominate directors to appear on issuer proxy statements. While this provision doesn’t specifically address potential conflicts with state law, this language should help the SEC fend off a legal challenge from corporate advocates who assert that the agency lacks the authority to adopt an access rule. The bill sets a floor for the minimum ownership threshold (a 1 percent stake for at least two years prior to the next annual meeting) that the SEC may impose, but does not establish a ceiling for such requirements. In 2007, investors complained that a proposed 5 percent threshold for filing access bylaw proposals was too high. While the law does not set a time period for the SEC to act on proxy access, the commission plans to propose several alternative rules at an open meeting today.

Other Governance Standards: Most (if not all) companies would be required to appoint independent board chairs, eliminate staggered board terms, establish new risk committees of independent directors, and adopt a majority vote standard in uncontested elections. Given that majority voting rules can be used to thwart dissident candidates, the law specifies that plurality voting shall apply in contested elections where the number of candidates exceeds the number of directors to be elected.

The bill directs the SEC to act within a year to require the national exchanges to make these four mandates part of their listing standards. However, Schumer’s legislation authorizes the SEC to exempt companies based on size, market capitalization, public float, or the number of shareholders of record. The SEC has granted various extensions to smaller issuers to comply with the auditor attestation requirements of Sarbanes-Oxley, so it’s possible that the SEC may exempt small firms from all (or some) of these governance standards or delay these requirements. The bill directs the SEC to allow issuers an opportunity to cure governance defects before being delisted, but no time period is specified.

These governance provisions, if approved, would have a significant impact on U.S. companies. While a majority of S&P 500 firms now have majority voting and annual elections for all directors, most do not have independent board chairs. Majority voting and declassified boards are less common at small issuers. Separate risk committees are virtually unheard of at U.S. companies, although the audit committees at many companies oversee risk issues, and some boards have compliance panels.

In sum, this legislation would go significantly farther in changing corporate governance practices and expanding shareholder rights than even the Sarbanes-Oxley Act, which primarily targeted accounting and financial reporting practices.