What should we call the looming changes in how directors are elected and overseen at public companies? A seachange? A paradigm shift? A whole new ballgame?

Any of the three convey a rudimentary sense of what’s coming, but those phrases are overused and hackneyed. Worse, none capture the truly profound dislocation of what used to be a pillar in corporate structure. And they certainly don’t begin to suggest how directors and companies need to respond.

Consider that in just the last three years, we’ve seen widespread adoption of the majority-vote standard to elect corporate directors, and a 150 percent increase in the number of activist battles for board seats. We’ve also seen activists win board seats at three of every four companies they do challenge.

The pace of change is about to become even more dizzying. Here is the roster of pending issues your company’s board should be watching:

On May 20, the Securities and Exchange Commission proposed regulations allowing limited proxy access for shareholders. By giving large shareowners the ability to place nominations for up to 25 percent of the board on the company’s own proxy statement, the SEC would make contested elections easier and less expensive.

That same week, Sen. Charles Schumer, a leading Democrat on the Senate Banking Committee, proposed legislation that would essentially codify the SEC’s proxy access rule; mandate shareholder advisory votes on executive pay packages for all public companies; and prohibit the common U.S. practice of letting CEOs also serve as chairman of the board.

The SEC is considering how to end “broker voting,” the practice of broker-dealers casting votes in director elections when their shareholders provide no voting instructions. Such votes have been cast overwhelmingly for corporate nominees.

And in an event generally overlooked by the media, investors with $1 trillion under management wrote to SEC Chairman Mary Schapiro calling for more disclosure of directors’ qualifications. The group is asking for more details about the nominating process, the skill sets of director candidates, the candidates’ corporate governance philosophy, and their views of the company’s specific situation. (The letter arrived the very day the SEC made its proxy access proposal.) Signatories included the California State Teachers Retirement System, the New York state comptroller, and several pension funds from Britain and the Netherlands.

Any one of those reforms would pack a potent punch. The combination of them will be even more disorienting to those accustomed to the status quo. At the extremes, directors at U.S. companies will have gone from a situation where they rarely had any challenge, could get elected with a single vote, had broker votes in their back pocket, and never had to justify their actions to shareowners—to a new world where they may be challenged, must explain to shareowners why they should be supported, and must win a majority of votes, with only those votes actually cast by owners counting. To top everything else off, one of directors’ most important decisions—executive compensation—will now be subject to shareholder review.

Like it or not, we are moving from the age of the insulated board to the era of the empowered shareowner. Here’s how to deal with the new reality.

Three Steps

First, exhale. Institutional investors such as CalPERS or PGGM own shares in literally thousands of companies. They do not want to deal with contested elections at every one of their portfolio companies. Not even the activist funds want corporate elections to resemble contests for president or first selectman. Internally, they’re not staffed for that. Externally, they believe it would be a distraction and waste of resources. These people want orderly shareholder meetings that focus on corporate growth as much as you do.

So why do they support such changes? Certainly they want to be able to effect change at problematic companies, but that group is less than 5 percent of the universe of public companies. More importantly, institutional investors believe that having such authority will have a generally salutary effect. As former SEC Chairman William O. Douglas famously remarked, letting people know you have a shotgun behind the door makes it less likely you’ll have to use it. Corporate America probably will see more contested elections than it would have without proxy access. But we expect the number to be far less than the doomsday scenarios some critics predict.

Second, take a good look at the “Trillion Dollar Group” proposal for more disclosure about directors’ qualifications. (It can be found at www.reinhartinvestor.com or above right.) Instead of viewing this as an additional burden in a shareowner-centric age, think of it as the key that unlocks the new shareowner-centric governance puzzle.

As long-time participants and observers in the corporate governance community, we maintain that the single biggest motive for all the reforms of the past 25 years has been the sense of voicelessness and helplessness felt by major institutional investors. One source of that belief has been their lack of vision into the boardroom. If directors are supposed to represent shareowners (at least in part), but never communicate with shareowners, then owners become concerned and suspicious when a company does not perform.

If we are correct, then companies that adopt more fulsome disclosure about who the director nominees are, together with a cogent rationale for why they are being nominated, reduce potentially successful challenges to those elections. Consider having a Web page devoted to each director, not just a paragraph. Or have the directors each make short statements at the annual general meeting, rather than just standing up to be acknowledged. Or offer a conference call or podcast with directors speaking directly to shareowners.

Third, consider whether your company really needs a combined chairman-CEO role. While that model has been the norm in the United States, it isn’t in most other markets. Whether or not the Schumer legislation becomes law, the ground here appears to be shifting. Look at the recent Bank of America annual general meeting, where shareowners re-elected CEO Kenneth Lewis as a member of the board, but stripped him of his chairmanship.

We suspect more companies will begin voluntarily separating the chair and CEO positions. As happened with majority voting over the past several years, the threat of change will spark the actual change. To be sure, adoption won’t happen overnight unless forced by law—after all, few, if any, incumbent chairman-CEOs will want to yield power voluntarily—but as they naturally retire or otherwise leave, some percentage of those companies will get ahead of the trend and split the positions. If we had to bet, we suspect that Schumer’s legislation will be modified to set separation as a default position, but still allow companies to either comply or explain why they choose to combine the position (as is the case in Britain).

So, if you really believe your company should have a combined chairman-CEO, be ready to explain why. In fact, that might be good advice for a lot of board actions in the future that’s coming.

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