"We don't have an agreement on this issue, and I don't feel bound by an arbitrary timetable," SEC Chairman William Donaldson recently said. "It's more important that we find the correct answer than to do this quickly."

Giving large institutional investors even the limited ability to nominate directors who would be carried in company proxy materials would significantly alter the governance landscape and increase corporate democracy.

Agency Commissioner Harvey Goldschmid has called the proposed effort "the single most significant way for investors to dramatically improve corporate governance in the United States."

The trick is granting entry where directors have truly been unresponsive while avoiding turning boards into free-fire zones for special and political agendas.

A complicated SEC proposal that calls for triggers before holders have the ability to nominate up to a few directors has been the subject of public debate for about a year.

"We need to address this issue in a manner that defines shareholder dissatisfaction," Donaldson said.

There are "legitimate interests and concerns on both sides of the proxy issue," he added.

Business groups worry that a new rule, even with caveats limiting investors' nominating opportunities, could create dysfunctional boards out of synch with corporate managements. Large investors, on the other hand, can now only sell their shares or launch costly proxy fights to counter boards indifferent to their concerns or tolerant of ineffective top managers.

And, many of those investors argue, they own the company, after all.

Part of the problem is that right now, the only way investors can express dissatisfaction with a candidate is to withhold a vote. But 99 percent of investors can withhold and the director will still take his seat with 1 percent of the votes.

"Much of the jurisdiction in this area is governed by state law, and we don't have the ability to affect or change state law," Donaldson said. "That makes it even more difficult and complex to develop a proposal that will address the problem."

Given the lack of consensus at this point, the commissioners of the watchdog agency might be best advised to return to basics.

The minimum needed for real reform of the current system is to make director elections real elections, even if those put up for election come only from independent nominating committees of the board, rather than in certain cases from large shareholders.

In a real election, if 50 percent of the voters withhold their approval of a director, that director should not serve. The nominating committee or some other group would have to put up another candidate.

A plan that would make director elections real elections was proposed to the SEC by ex-SEC member Joseph A. Grundfest, now a professor at Stanford law School, and others.

This plan finds ways to overcome the hurdles presented by state laws affecting director elections. And if there's no ability for direct nominations from institutional investors, Grundfest argued in his April proposal to the SEC that there are certainly incentives for nominating committees to consult with investors before proferring candidates.

The important issue of director nominations shouldn't be left to linger. A less ambitious plan that still creates real reform might be a workable alternative to the current proposal.

-- Neal Lipschutz