Shareholders would have greater power to nominate corporate directors, a process now tightly controlled by company management, under a proposal issued by the U.S. Securities and Exchange Commission on Wednesday.

With a recession and global credit crisis helping focus attention on the quality of corporate boards, the SEC voted 3-2 to propose two approaches aimed at giving shareholders an easier way to influence the selection of directors -- an issue also known as proxy access.

The SEC, which split along party lines with its two Republicans dissenting, received quick praise from institutional investors but a sharp rebuke from business.

One approach would let shareholders owning 1 percent to 5 percent of a company's shares, for at least one year, nominate directors.

This approach would be linked to the company's size, with shareholders required to hold at least 1 percent in a large company, 3 percent in a midsize company and at least 5 percent in a small company.

The other approach would amend a federal rule that sets guidelines for whether a company's management can exclude shareholder proposals from the proxy that is sent to investors before a firm's annual meeting.

The SEC would let shareholders propose amending company bylaws so they could nominate directors.

This approach would effectively overturn a 2007 SEC decision made under the leadership of former chairman Christopher Cox that allows companies to exclude shareholder proposals for director nominations from corporate ballots.

There is a 60-day comment period on the proposal. The five-member agency will most likely decide later this year whether to finalize one or both approaches.

SEC Chairman Mary Schapiro and the two Democratic commissioners supported the proposal saying the time had come to give shareholders a real say in determining who will oversee their company.

I believe that the most effective means of providing accountability... is to ensure that shareholders have a meaningful opportunity to effectuate the rights that they already have under state law to nominate directors, Schapiro said.

The two SEC Republican commissioners took issue with the far-reaching implications of the measures and said the agency was over stepping its jurisdiction.

Kathleen Casey, who voted to restrict shareholder access to the proxy in 2007, questioned the SEC's authority to influence corporate governance rules that are overseen by state law.


The business community, has resisted giving shareholders greater proxy access, arguing it could give special interest groups too much power to the detriment of other investors.

This is a step in the wrong direction said the U.S. Chamber of Commerce, the country's largest business lobby, adding it would vigorously oppose the SEC proposal. The Chamber is widely expected to sue the SEC.

The SEC has long wrestled with the issue of proxy access, considering several changes over the past six years.

Shareholders can currently nominate their own slate of directors, but they can only do so through proxy fights, which many shareholder activists consider expensive and burdensome.

Demands to give shareholders, the owners of companies, more power to shake up boardrooms have only increased now the government has had to use billions of dollars in taxpayer funds to prop up companies like Bank of America , Citigroup Inc and American International Group

On Tuesday, senior Democratic Senator Charles Schumer introduced legislation that would give shareholders more say on executive pay packages. His bill also is aimed at giving shareholders and pension fund investors a voice in the corporate board room.

Under the SEC approach linked to company size, shareholders would only be allowed to nominate up to a quarter of the company's board of directors.

Shareholders would also be required to sign a statement declaring their intent to continue to own their shares through the date of the annual meeting. They would also be required to certify that they are not pushing for the company to sell itself or seeking to gain more than minority representation on the board of directors.

The Council of Institutional Investors, which represents public, union and corporate pension funds that hold more than $3 trillion in assets, applauded the SEC's action.

Access to the proxy would invigorate board elections and make boards more responsive to shareholders, more thoughtful about whom they nominate to serves as directors, the council said in a statement.

(Reporting by Rachelle Younglai; Editing by Tim Dobbyn)