A test for the SEC’s chief
In his first year as chairman of the Securities and Exchange Commission, Christopher Cox is widely credited with bringing accord to a panel that was bitterly divided over how aggressive it should be in policing corporate wrongdoing in the wake of Enron and other scandals.
The former Republican congressman from Newport Beach has shepherded a handful of reform-oriented measures without controversy, steering clear of proposals on which the odds of finding common ground appeared slim.
Now, however, a federal appeals court decision has tossed a grenade-like issue into the SEC’s chambers -- putting Cox’s diplomatic and leadership skills to their toughest test.
The court decision is forcing the agency to again confront demands to give shareholders a bigger say in the nomination of corporate directors. Former SEC Chairman William H. Donaldson unveiled a plan to do so in 2003, but it fizzled after triggering a partisan split on the commission and generating business opposition so fierce that many believe it contributed to Donaldson’s departure.
Although the panel’s makeup has changed, it is not clear that the group of three Republicans and two Democrats can take more than a cautious step to open up elections before exposing its own ideological differences. Nor is it clear that Cox is prepared to follow his predecessor in bringing up matters that force him to cast contentious, tie-breaking votes.
“Having a unanimous commission is ideal, and Chairman Cox has done an excellent job of building consensus,” said Harvey J. Goldschmid, who left the SEC last year and is now a professor at Columbia University School of Law. “But on issues of this significance, doing the right thing is of far greater consequence than having a dissenting vote.”
Goldschmid, a Democrat, believes regulators should make it easier for shareholders to nominate candidates for corporate boards and to have these nominees included in a company’s official election materials.
For years, the SEC has allowed companies to reject such requests. In September, however, the U.S. Court of Appeals for the 2nd Circuit ruled that the agency was wrong when it allowed insurer American International Group Inc. to block such a resolution by the pension plan for the American Federation of State, County and Municipal Employees.
The court found that despite the SEC staff’s routine rejection of such requests, the agency’s policy statements on the matter had been contradictory.
Within hours of the ruling, the SEC said it would address the issue at an October meeting to make sure its rules were applied consistently.
But soon before the meeting last week, the SEC postponed the public airing until December.
“It’s simply not soup yet,” one official said.
Regulators now hope that in December they will be able to offer companies guidance on the issue.
More broadly, they are trying to write a rule that would give shareholders greater rights to place independent board candidates on the corporate ballot card.
In an interview, Cox expressed support for the basic principle that shareholders deserve a say in the corporate nomination process.
“The right of the owners of the company to choose the directors who represent them is fundamental,” he said. “The Securities and Exchange Commission has among its significant responsibilities protecting that right.”
The matter of moving beyond principle to a specific proposal is where the issue gets thorny and emotions get hot, and Cox declined to elaborate on his views.
For investor activists, including unions and public pension funds, the goal of nominating board members goes to the heart of shareholder democracy. Inside the executive suite, however, that same goal may be seen as an unwelcome effort by special interests to meddle in running the company.
Currently, shareholders who wish to oppose nominees that are handpicked by the company have little choice other than to withhold their votes or shoulder postage costs for a write-in revolt -- limits that place a heavy burden on all challenges.
In 2004, for example, the full-bore assault on Michael Eisner as chairman of Walt Disney Co. was deemed a big success when about 45% of shareholders withheld their support.
Cox, who as chairman of the House Committee on Homeland Security tried to smooth over differences between its Republican and Democratic members, has tried to keep schisms out of the five-member SEC, which was deeply divided before he took the helm in 2005.
Among the most divisive issues was the matter of shareholder rights to nominate directors. That measure prompted the biggest barrage of public comments, pro and con, in the agency’s history.
Donaldson, a former Wall Street investment banker, was unable to win support among fellow Republicans, and business groups complained angrily about his proposal to the White House, which accepted his resignation.
Republican Commissioners Paul S. Atkins, a leading opponent of the 2003 proposal, and newcomer Kathleen L. Casey did not respond to requests for comment. Democratic Commissioners Roel C. Campos and Annette L. Nazareth are known to sympathize with the shareholders’ goal, although Nazareth has publicly supported a cautious, go-slow approach this time around.
“I don’t think the commission wants to go back to that experience” of 2003, said Fred R. Buenrostro Jr., chief executive of the California Public Employees’ Retirement System. He recently led a delegation to meet with each commissioner on the matter.
A technology enthusiast, Cox would like to defuse the shareholder voting issue, at least in part, through the Internet’s potential to give investors an easy and cheap way to make their feelings known. He called it a “happy coincidence” that a separate proposed rule allowing companies to deliver their election materials on the Internet is also scheduled for the December meeting.
“In the future the Internet will help alleviate a great deal of the expense that has made it difficult for shareholders to participate in the process,” he said.
Activists, however, generally don’t view access to the Web as the full answer to their goal of democratizing board elections, and they want to be able to place the names of independent candidates directly on corporate ballot cards.
When a company continually ignores shareholder resolutions, or when executives or board members engage in misconduct, such efforts may be necessary, they contend. Revelations that Hewlett-Packard Co. detectives spied on board members and journalists, for example, recently prompted a group of pension funds to propose that the company alter its rules so that shareholders could nominate members of the board.
Activists say the goal is no less than democracy: “If it’s good enough in Afghanistan and Iraq, why not in corporate boardrooms?” asked CalPERS’ Buenrostro.
On the other side, however, business lobbyists are making the case that a rule change could do more harm than good. Corporate America, they contend, is still absorbing the Sarbanes-Oxley reforms that were passed after the Enron debacle. Further, they say that other changes, such as growing acceptance of a majority-vote requirement to win board seats, have improved governance and made directors more vigilant than ever.
They oppose a broader role for shareholders in board elections.
“This would be tremendously disruptive and could require expenditure of significant corporate resources and discourage directors from serving on corporate boards,” cautioned Steve Odland, CEO of Office Depot Inc., in a letter to the SEC on behalf of the Business Roundtable, which represents large U.S. corporations.
Since taking the helm in August 2005, Cox has helped impose stricter disclosure rules for executive compensation and new restrictions on “soft dollar” arrangements that reward stockbrokers with higher commissions in return for research and other services.
Shareholder voting, however, goes directly to the balance of power between management and shareholders, making a pain-free compromise harder to reach. Moreover, establishing a rule could require difficult decisions on how large a bloc of shareholders is required to merit a say in nominations and how long they should own their shares.
The proposal from the American Federation of State, County and Municipal Employees, for example, would apply to shareholders owning 3% of a company’s stock for a year or more. These and other details are grist for the emerging SEC debate.
“Chairman Cox has worked hard and successfully to keep commissioners on the same page,” said Amy Borrus, deputy director of the Council of Institutional Investors, which represents public, labor and corporate pension funds whose combined assets exceed $3 trillion. “Proxy access, though, will be a tough test of his consensus-building skills.”
