States Fault SEC on Proxy Reform Plan

Pension officials from California and other states Thursday blasted a plan now before the Securities and Exchange Commission that they had hoped would give investors greater influence in corporate board elections.

The criticism, which came from some of the same officials who pressed to remove Richard Grasso as head of the New York Stock Exchange last month, heightens pressure on the SEC as it struggles to reform the process by which board members are elected.

The SEC plans to unveil its new rules on corporate elections next week. But details have begun to leak out, prompting complaints that the rules could unfairly hamper investors who want to nominate board members other than those handpicked by management.

In particular, critics Thursday took issue with proposed “triggers” that would limit the circumstances under which such nominations could be made and would allow only investors with huge holdings -- perhaps 1% or more of a company’s outstanding shares -- to nominate directors.

“I do not believe we’re going to have fundamental reform ... until the owners of America’s corporations are allowed to have a reasonable role in governing the corporations they own,” California Treasurer Phil Angelides said at a telephone news conference. He was joined by New York state Comptroller Alan Hevesi and other officials representing pension funds with combined assets of $643 billion.

Under current rules, shareholders who want to nominate a director without the support of management must stage a proxy contest, which requires them to publish materials, mail them to shareholders and solicit votes independently -- a process that can cost hundreds of thousands of dollars. Management, meanwhile, includes its director candidates on proxy statements that are prepared and mailed to shareholders at company expense.

Corporate reform advocates have long pushed for greater participation by shareholders in board elections as a way to strengthen the independence of directors and enhance their watchdog role over management. Such a change, they say, would reduce the likelihood of future breakdowns in corporate governance such as those that occurred at Enron Corp., WorldCom Inc. and other firms.

Major corporations, led by the Business Roundtable, have responded that changes that are too sweeping could bring other dangers, such as constant, time-consuming election battles, and could elevate the power of investors with narrow agendas.

Since last spring, when the SEC began reviewing the issue, it has been trying to find a middle ground.

“While you want fair access when it’s needed, you don’t want constant disruption at a whim,” one SEC source said Thursday, adding, “You have to balance all these concerns that people have been talking about since May.”

The new SEC rules, due to be formally unveiled as early as Wednesday, are expected to set forth certain standards that must be met before shareholders are allowed to directly nominate directors.

Such standards could include evidence that a board member has repeatedly been elected in ballots in which many votes were withheld. Under current rules, investors may either vote yes or withhold their votes, so a large number of withheld votes could indicate a high level of shareholder dissatisfaction with the board member.

In addition, the SEC proposal probably would include a requirement that, to make a nomination, shareholders must own a certain percentage of the company’s stock. That threshold could hinder even well-heeled shareholders. Pension funds, for example, may own less than 1% of a company’s shares because they spread their investment dollars widely.

The SEC proposal also is expected to contain a required time lag before any nominations by shareholders could lead to actual board elections. The lag, perhaps of one year, is intended to make sure that those investors who get involved in corporate politics have a long-term interest in the company.

If the SEC moves forward as planned, the public probably would have 60 days or longer to file comments on the proposed rules. Commission members would debate and vote on a final rule sometime after that.

The issue has subjected the SEC to intense lobbying. Henry A. McKinnell, chairman of Pfizer Inc. and an official with the Business Roundtable, earlier this week urged SEC Chairman William H. Donaldson to have the matter researched more thoroughly to make sure a new rule does not unintentionally stifle “innovation, productivity and economic growth.”

The state treasurers and pension funds also wrote Donaldson this week, cautioning that “the use of triggering requirements would force undue delay and could effectively render any new rules meaningless at all but a handful of companies.”

Critics also are concerned that the rules probably would require that director candidates have no connections to those who nominate them. In practice, that could unfairly limit the choices of investors, critics say.

The dispute is heating up at a time of growing sensitivities within the SEC and increasing questions on Capitol Hill as to whether the regulatory agency is pressing ahead fast enough with a host of post-Enron reforms.

Yet as some see it, the shareholder election issue doesn’t need to be inflammatory.

Most likely, such disputes would come up less than 1% of the time, said Nell Minow, editor of the Corporate Library, which advocates reforms in corporate governance. Moreover, she added, a successful alternative candidate would have to pass muster with a wide range of voters.

“You’d need pension funds, foundations, mutual funds, money managers,” Minow said. “Anyone who can get support from all those sides deserves to be elected to the board.”