Shareholder Plan a Flash Point for SEC
Securities and Exchange Commissioner Harvey J. Goldschmid had a warning for Chairman William H. Donaldson when regulators announced plans to give shareholders more clout in corporate elections.
“I remember saying to him this may create a firestorm, but it’s the right thing to do,” Goldschmid recalled. The SEC proposal, he added in a recent interview, is both “moderate and fair.”
Critics of various stripes might object to that description. But on this much everyone agrees: Goldschmid was right about the firestorm.
The SEC proposal -- touted as a pathbreaking step toward corporate democracy -- has bogged down in controversy. It once was expected to be a done deal by early this year. Now its survival is in question.
Although the details have been in flux, the basic idea is to give large investor blocs limited power to field dissident nominees for the board, and to do so with a company’s official election materials.
Backers say that would give major shareholders powers that are long overdue. Critics contend that it would allow narrow interests to disrupt company management.
Donaldson, the SEC’s Republican chairman, has been caught in the middle, struggling to avoid a confrontation with the business community as the sides have grown more polarized. Venting his frustration in a recent Stanford University speech, Donaldson complained that “the escalating, shrill and fearful rhetoric on all sides of this issue has drowned out thoughtful discourse and comment.
“Let’s not mock those who struggle to find middle ground,” he added.
Lately, that middle ground has proved elusive for the SEC on other issues.
On Wednesday, commissioners are scheduled to vote on a proposal that would give the agency its first, limited role in regulating hedge funds, a type of private investment partnership that caters to wealthy, sophisticated investors. Hedge funds have played a central role in the alleged trading abuses roiling the mutual fund industry.
Donaldson supports at least some oversight and is likely to join with Democrats Goldschmid and Roel C. Campos for a majority vote in the five-member panel. The two other Republicans are expected to dissent.
That same divide emerged in June when the SEC split 3 to 2 in favor of a plan that would require mutual fund boards to be headed by independent directors.
The shareholder proposal is more divisive than the hedge fund and mutual fund issues.
Opposition from the Republican-oriented business community is passionate. In contrast, both Sen. John F. Kerry, the expected Democratic nominee for president, and his chosen running mate, Sen. John Edwards, have endorsed the idea.
“This is a kind of supercharged environment right now in the months leading up to the election,” said Patrick McGurn, special counsel with Institutional Shareholder Services, an investor advisory firm, explaining Donaldson’s caution. “The last thing the SEC wants is for this to get politicized in the broader sense, outside of their control.”
Currently, shareholders have few options if they wish to kick out a board member. They may withhold their votes, a symbolic gesture that can exert strong pressure if the boycott is big enough. In the case of Walt Disney Co., for example, Michael Eisner was removed as board chairman after 45% of votes were withheld, although he held on to his job as chief executive.
Such episodes are rare, however, and alternatives for unhappy shareholders, such as fielding dissident candidates, can be prohibitively expensive.
Given that reality, the SEC last fall unveiled its complex proposal to improve the odds for shareholders.
A new vote for the board could be triggered if shareholders collectively holding 1% of a company’s shares proposed a challenge and then managed to win support from a majority of shareholders for such a contest. Separately, another trigger for an election challenge would be pulled if 35% of shareholders withheld their votes in a board election.
The U.S. Chamber of Commerce blasted the approach as an attempt by unions and public employee pension funds to gain new leverage over corporate America. The Business Roundtable placed ads in major newspapers signed by chief executives of 40 large corporations, warning that the proposal would erode the independence of directors.
“We’re steadfast in our position that there have been dramatic and lasting reforms over the last two years,” Business Roundtable spokeswoman Tita Freeman said in a recent interview, pointing to corporate reforms already enacted. “We believe we need to step back and assess the impact of these changes before creating new rules and regulations.”
As opposition mounted, Donaldson began to show interest in a compromise dubbed “the cure.” This essentially calls for giving boards a second chance to address shareholder unrest. For example, if 35% of shareholders withheld their vote for a director, the board would be allowed to offer a replacement nominee and avoid an election challenge.
The GOP-backed attempt at compromise riled activists who viewed it as a disappointing retreat.
How Donaldson responds to the pressures will be “a defining point in the movement to restore the investor trust,” the trustees of 12 public pension funds, including the California Public Employees’ Retirement System, wrote the chairman in a May 27 letter.
“Your decision,” they added, “will determine whether investors’ legitimate concerns will be ignored or whether investors will be able to ask the hard questions that might have prevented an Enron or a WorldCom collapse.”
SEC staffers have said that a final shareholder rule must be in place by the end of summer if it is to govern next year’s annual meetings. Others say it could be approved as late as this autumn.
Whatever the case, it’s far from clear that either deadline will be met. Disparate members of the SEC insist that the initiative remains alive, although no one is offering details of a compromise that might salvage it.
“I’m optimistic that we can find a solution that will get everybody on board,” said Commissioner Paul S. Atkins, a Republican who is often depicted as an opponent of shareholder access. In an interview, Atkins said the corporate election process “definitely needs repairing.”
Goldschmid, a strong advocate of shareholder access, also hasn’t abandoned hope. “There are potential compromises that would be effective and work in the public interest,” he said. “I’m hopeful we’ll get to the right place before the summer is out.”