New Rules Empowering Shareholders Take Hold : Regulation: As the first proxy season under SEC’s reforms approaches, there’s plenty of action in corporate boardrooms.

During the last two months, Westinghouse Electric Corp., Time Warner Inc., and American Express Co. have announced that they will revamp their boards of directors.

In two of these cases, the changes are said to have come at the behest of institutional investors, who have conducted a multi-year campaign to improve the financial performance of laggard companies in which they invested.

While these boardroom reshufflings have made headlines, less attention has been paid to the newest element in the burgeoning reform effort: a series of recent rule changes by the Securities and Exchange Commission that enable institutional investors to communicate with one another more freely, make their opinions known to management and push for change in corporate policy.

“Companies are responding more carefully to shareholder requests because they know that shareholders (now) have the clout to force actions if satisfactorily negotiated resolutions are not achieved,” said David Lefkowitz, an attorney with the New York law firm of Weil, Gotshal & Manges.

Officials at Time Warner and Westinghouse could not be reached for comment on whether the threat of a more heated proxy season led them to reform their boards in advance. An American Express official said that wasn’t the case in the planned resignation of Chairman James Robinson.

Nevertheless, a number of other companies have taken steps to reform their boards or enact other shareholder proposals before the first proxy season to be conducted under the new SEC rules begins.

McDonnell Douglas Corp., for example, has tentatively agreed to place only independent directors on the corporate committee that nominates new board members, according to the New York City comptroller’s office, which proposed the idea. However, the two sides are wrangling over the meaning of the term “independent.”

International Specialty Products Inc., a Wayne, N.J., specialty chemical producer, added two new outside directors to its board in late November, although a company spokesman said the change was made simply to add some experience and knowledge to the board.

Meanwhile, Grumman Corp., Caterpillar Inc., Occidental Petroleum Corp., Aetna Life & Casualty Co. and Marsh & McLennan Cos. Inc. have all agreed to adopt proposals submitted by the New York City pension funds, according to the city comptroller’s office. These resolutions relate to confidential voting and the disclosure of those submitting shareholder proposals rather than to board-related activities.

“Before the rules, board members were not as attentive to shareholders as they may be under the current proxy rules,” said Richard Roberts, one of four SEC commissioners. “Obviously we played an important role in tinkering with the proxy rules to fine-tune the proxy mechanism, thereby allowing shareholders to be more active in the election of independent-minded corporate directors.”

The SEC in October approved a package of reforms to the corporate proxy rules that make it easier and cheaper for institutional investors, such as banks, insurance companies and public pension funds, to communicate with one another.

In essence, the amendments provide an exemption from the proxy rules for communications by anyone who isn’t formally soliciting proxies and who doesn’t have a substantial interest in the issue. Shareholders are no longer constricted by the proxy rules if they announce how they plan to vote on proxy resolutions, and can also make solicitations through the media without having to mail proxy statements to all shareholders.

The rule changes coincide with a recent effort by institutional investors to obtain more say at poorly performing companies in which they have invested. Rather than simply selling their stock in under-performing companies, a move that often drives down share prices and further decreases returns, investors are seeking reforms, often at the board level.

“We feel that the best place to hold the company accountable is through the board of directors,” said Eric Wollman of the New York City comptroller’s office, which has made board reform a central plank of the proposals it submits to companies this year.

“There is the feeling on the part of some of these funds that boards have not been sufficiently watchful in overseeing what the top management is doing,” said Stan Sauerhaft, vice chairman of the public relations firm of Burson-Marsteller, which has formed a corporate governance group to help companies adapt to the new proxy rules.

Ronald Gilson, professor of law and business at Stanford Law School, noted that the reform efforts began in the late 1980s, when the previous tool for influencing management, corporate takeovers, fell into disuse.

Nevertheless, the October rule changes have freed shareholders from the fear that they must comply with certain proxy rules, such as getting communications preapproved by the SEC, when they wish to express their views.

“One of the most significant changes is a kind of psychological boost that shareholders have received from the SEC, a kind of ‘stamp of approval’ for shareholder activism from the SEC,” said John Wilcox, chairman of Georgeson & Co. Inc.

The push for greater board accountability is borne out in several ways. For instance, shareholders have submitted 53 proposals relating to board structures this year to the nation’s top 1,500 corporations, up from 19 at the same time last year, according to the Investor Responsibility Research Center in Washington.

Of the 53, 38 call for boards made up of a majority of independent directors and/or nominating and compensation committees made up entirely of independent directors; last year there were 11 such proposals at this time.

Ultimately, the effort to reform corporate boards could radically change their membership and their role in overseeing companies, several people said.

For instance, companies may have to expand the types of people they are willing to consider for nomination to their boards, Wollman said. And these directors will have to learn more about the companies they are overseeing.

“If someone is looking for an easy job, it is true a directorship is not what it used to be,” Wollman said.