In September, in a case brought by the American Federation of State, County and Municipal Employees Pension plan (AFSCME), a Delaware court ruled that the international insurer AIG would have to include in its proxy material an AFSCME-sponsored proposal that would allow any shareholder owning more than three percent of the firm to list its own nominees for board seats along with the company’s choices. Before this decision, the Securities and Exchange Commission (SEC) had ruled that any matter relating to an election of directors could be excluded from a company’s proxy statement, but the court refused to enforce this policy because it determined that the SEC had been inconsistent in invoking it in the past. AIG is a Delaware corporation, and thus the court’s decision will open the floodgates to similar proposals for all Delaware companies.

The court did not strike down the SEC’s position—the SEC was not a party to the suit—but gave the agency the opportunity to clarify its position, either restating its former policy (and giving its reasons for doing so) or adopting a new one.

The SEC was supposed to react at Wednesday’s meeting, but apparently the commissioners have not found common ground. Instead, citing a full agenda, the Commission put the issue off until at least January. The SEC is not bound by the court’s decision, but there are indications that the Commissioners are split on how to respond to the ruling. By putting off the decision for at least another month, the Commission has left companies uncertain about their obligations to shareholders as the annual meeting and proxy season approaches.

This raises immense difficulties for companies that will now be receiving proposals from shareholders, who may demand the same treatment AIG has been compelled to offer AFSCME. In a sense, delay hands the ball to the shareholder activists, since without an SEC position, the rule—at least for companies in the Second Circuit—is that they must include such a amendment in their proxy material. Companies outside the court’s immediate jurisdiction, however, are likely to feel that they should also follow the court precedent. Failure to do so—especially without the imprimatur of the SEC—will simply embroil them in litigation. The prospect that annual shareholder meetings in 2007 will become politicized by contests between shareholder activists and corporate managements has become very real.

The failure of the SEC to act is difficult to understand. The original SEC position made a great deal of sense, since it required those who wanted to challenge a company’s board nominees to prepare and distribute their own proxy material. This process would provide shareholders with the necessary information to make a decision. On the other hand, including the nominees of shareholders in the company’s proxy statement would leave shareholders largely in the dark about what exactly are the issues that provoked the rival nomination and how the nominee of the dissident shareholders would improve corporate governance or corporate performance. In addition, if the amendment passes, it will open corporate annual meetings to politicized issues such as the company’s attitude toward global warming, as groups of shareholders try to change or redirect the approaches that companies take to political issues.

This may not be an issue on which Chairman Cox can get a unanimous vote—some issues simply cannot be compromised to that extent. In that case, the best policy would be to reaffirm the Commission’s longstanding position in favor of using the proxy system to conduct election contests for seats on corporate boards. A shareholder access proposal supported by former SEC chairman William Donaldson in 2003 was hugely unpopular with corporations, and their strong protests to the SEC caused the agency to abandon the idea. Another nod in this direction, sponsored by a different chairman, will undoubtedly bring forth the same or greater opposition. There are too many important issues on the SEC’s agenda to allow this to embroil the agency in another shareholder access controversy. The Commission should publish a policy statement explaining the importance of using the proxy rules for board elections and move on. In any event, it must not let this issue drag on beyond January.

Peter J. Wallison is a Senior Fellow at the American Enterprise Institute.