SEC Split on Aiding Investor Challenges
The outburst of shareholder ire at Walt Disney Co. last week did more than cost Michael Eisner his job as board chairman.
It also increased pressure on the Securities and Exchange Commission to move ahead with a plan to give investors a louder voice in elections throughout corporate America.
“You couldn’t come up with a more graphic example of why it’s needed,” said Patrick S. McGurn, senior vice president of Institutional Shareholder Services, which advises pension funds and other major Wall Street investors.
The SEC measure would make it easier for big investors to mount dissident campaigns for the board, using a company’s official election materials in the quest.
That would be a sharp departure from the traditional state of affairs in which unhappy shareholders have little choice but to withhold their votes, as they did at Disney, or to mount costly, independent challenges, as Disney dissidents Roy E. Disney and Stanley P. Gold are mulling.
In proposing a change, federal regulators have sparked the largest outpouring of public comment in the agency’s history -- more than 13,000 letters, most supporting the change or pushing regulators to go further.
Moreover, the proposal has exposed a deep partisan divide among the five members of the usually collegial SEC, and brought dire warnings from corporate America that companies would face a disruptive barrage of shareholder revolts.
“I’ve never seen a more sharp and more emotional debate between corporations and shareholders,” said Richard H. Koppes, an attorney with Jones Day in Sacramento and Los Angeles, and former general counsel at the California Public Employees’ Retirement System, one of the groups that turned thumbs down on Eisner.
Under the proposal, which is backed by SEC Chairman William H. Donaldson, large shareholders who surmount a series of hurdles would for the first time get the right to place names of board candidates on company mailings and ballots.
The challenge could begin, for instance, if at least 35% of the shareholders withheld their support from a board candidate during an election -- a test more than met at Disney, where the tally to withhold for Eisner reached 43%.
Alternatively, a shareholder group owning 1% of the stock could propose a challenge, and that proposal would need to win a majority of shareholder votes. Either way, the following year, investors representing 5% of the company’s stock could put candidates on the official corporate ballots.
“If there is a better idea out there, we want to know about it,” Donaldson told a legal audience in Washington on Friday, according to a copy of his prepared remarks.
He referred to the SEC approach as “measured” and a “middle ground” that would limit challenges to companies where they were truly needed.
The middle ground has proven to be a relatively narrow terrain, with vehement detractors on all sides.
Many shareholder activists, including large pension funds, labor unions and state treasurers, complain that the SEC plan doesn’t go far enough. They say it sets excessively high standards to trigger a vote and disenfranchises smaller owners. Another complaint is that it could take a year or more to reach a vote, allowing grievances to go unanswered.
“It’s ridiculous that corporations feel so threatened by this when it’s such a modest proposal,” said Tracey Rembert, coordinator of the Shareholder Action Network.
For their part, corporate executives warn that it would unleash a torrent of disruptive challenges, often by investors whose goals may be far more narrow than the mass of shareholders. The supposed rash of contests, they contend, would eat up time from executives -- time better spent on running companies in the best interests of the majority of investors.
“We think it would hit hundreds and hundreds of companies, including those with the highest standards of corporate governance,” said John J. Castellani, president of the Business Roundtable, which is spearheading opposition to the plan and represents the corporate establishment.
In response to the extraordinary public reaction, the SEC in February took the unusual step of inviting more comments and scheduled a special round table for Wednesday.
Two of the SEC’s three Republicans remain wary of the plan. The two Democrats support it. Donaldson, the GOP chairman, could cast the tie-breaking vote in favor but is struggling behind the scenes to design a final rule that can win over his fellow Republicans.
Advocates once expected to have the rule in place for the season of annual meetings which has just begun and runs into June. They are still hoping to approve a rule soon after the March round table.
“This is in the shareholders’ interest but also in the nation’s interest,” said SEC Commissioner Harvey J. Goldschmid, a Democratic backer.
Republicans aren’t giving ground: “We have to make sure that we proceed carefully here,” said Republican SEC Commissioner Paul S. Atkins, who worries that narrow interests might “play fast and loose with the rules” to place their allies on a corporate board.
One area of dispute is the timing. As currently written, the proposal would apply retroactively to the beginning of this year -- fine print that could have far-reaching implications for Disney if it remains in the plan.
That is because the large withhold vote aimed at Eisner is enough to trigger a board challenge, if investors representing 5% of the ownership were to agree on such a move at next year’s annual meeting.
While SEC insiders were far from certain that the retroactive requirement would remain in the plan, shareholder advocates last week could not help but wonder whether Disney’s restless investors had set in motion the fateful, first exercise of the new powers.
“If the rule, as proposed, goes forward, we’re off to the races,” said Nell Minow, editor of the Corporate Library, a shareholder advocacy group.
Just how much influence the SEC plan would actually confer on shareholders remains a matter of dispute. Still, many believe it would represent a noteworthy change in the traditional balance of power between investors and management.
In that sense, the furor at Disney may be telling. Few shareholders have the means and influence of Eisner’s main antagonists, Roy Disney and Stanley Gold (both of whom, not surprisingly, support the SEC proxy reform plan as a good first step toward empowering shareholders).
The campaign by the two former Disney board members to get shareholders to withhold support from Eisner “had as much success as it had because of their willingness to fly around the country in their private plane and meet with all these institutional investors back to back to back,” said Gregory P. Taxin, chief executive at Glass, Lewis & Co., a research firm for institutional investors.
“This is not an act that can be easily repeated at some other company,” Taxin noted.
*
(BEGIN TEXT OF INFOBOX)
Vote Revolts
A look at some other high-profile examples of shareholder backlash against corporate directors, and how the targets fared:
2003: At AOL Time Warner’s annual meeting, 22% of shareholders withhold their votes for board member Steve Case. Case, anticipating the negative vote, resigns beforehand as chairman. Case remains on the board today.
2002: At Lockheed Martin, 28% of shareholders withhold their votes for director Frank Savage in a reelection challenge linked to his role as an Enron director. Savage remains on the board today.
2001: Service Employees International Union and other major investors urge Eastman Kodak shareholders to withhold support from four board members; about 17% of shareholders do so. One of the four directors leaves the board the next year. The other three remain on the board today.
2001: At mining company Freeport McMoRan Copper & Gold, a challenge led by New York City pension funds causes shareholders to withhold 18% to 25% of votes for a slate of five directors. The next year, in voting on a different set of directors, shareholders withhold nearly 39% of votes. Despite the votes, board membership remains largely unchanged today.
Source: Times research
Los Angeles Times
