SEC Plan Would Let Firms Put Ballot Materials Online

The Securities and Exchange Commission proposed a plan Tuesday that would let companies post their corporate election materials on the Internet rather than send them out in mass mailings to shareholders, a move that could save as much as $1 billion a year.

The proposed rule change also would allow dissident shareholders to put their own proxy statements online, making it far cheaper to mount challenges to board elections.

“It could be one of the most significant changes we’ve seen in the entire corporate governance debate,” said Patrick McGurn, senior vice president of Institutional Shareholder Services, a proxy advisory firm. “Shareholders could take on more boards with direct assault if the cost of doing so were very substantially reduced.”

SEC Chairman Christopher Cox said the action, approved unanimously by the five-member commission, was part of a broader agency effort to speed up and improve the quality of financial information to the public. Under a separate rule that takes effect Thursday, companies will be able to release the final prospectus for new securities offerings on the Web.

“Since most investors are already online, and more are coming online every day, we can use that as the wind at our back to make disclosure more accessible,” said Cox, who is trying to make the modernization of the SEC’s communications a priority of his tenure.

Under the proposal, companies would have the option of sending shareholders a postcard directing them to a website that contains details about an upcoming corporate election. Shareholders who prefer to review paper materials would be able to request them through a toll-free telephone number or by e-mail.

Currently, shareholders may ask to receive such election material electronically, but most still receive them by mail. The SEC estimates that the postcard option would save companies $500 million to $1 billion a year.

With Tuesday’s vote, the SEC staff will soon release a draft proposal for a 60-day public comment period. After that, changes may be made before a final vote.

Commissioners raised questions Tuesday about the mechanics of the process but expressed strong support for the concept -- making it likely that the new rules would be in place for annual corporate meetings in 2007.

Though the proposal focuses on routine proxy mailings, it also represents a cautious step by Cox into one of the most heated battlegrounds in corporate governance -- the issue of election challenges.

Such challenges are rarely successful, given the postage costs that dissidents must bear and the difficulty of winning a majority of votes against an entrenched management.

Even in the shareholder brawl in 2004 over Michael Eisner’s leadership of Walt Disney Co., Eisner managed to capture a majority of votes to retain his board seat -- although directors forced him to give up his chairman’s title.

A 2003 SEC proposal would have put in place a complex system under which unhappy blocs of shareholders could challenge board nominees and ultimately place alternative candidates on the official corporate ballot. But that proposal stalled out amid fierce resistance from business groups, which contended that the plan gave too much power to small groups of shareholders.

The new plan stops short of proposing a way for dissidents to win inclusion in official ballot materials -- eliminating a potential sticking point with business groups. Tom Lehner, director of public policy for the Business Roundtable, an association of chief executives of the nation’s biggest companies, called the proposal “a good thing” for its money-saving features.

Shareholder activists would prefer that the SEC give dissidents a way to gain access to company-financed proxy statements, said Beth Young, senior research associate at the Corporate Library, a pro-investor research firm.

But “recognizing that that’s not going to happen, easing the financial burden would be a step in the right direction for challengers, and I think it would be welcomed,” she said.

McGurn of Institutional Shareholder Services said mounting a proxy challenge to a public company with a large market capitalization can cost millions of dollars.

“At a middle-market firm or a small-cap, you’re still looking at six figures,” he said.

The printing and mailing of election materials is a large component of those costs, but a proxy challenge also needs lawyers to provide technical guidance and phone banks to solicit support from shareholders.

Dissident challenges are “still not something that’s going to be done on a lark or at the drop of a hat because of the other substantial costs that are involved,” said Alan Beller, who heads the SEC’s corporation finance division.

Though a shift to the Internet has obvious appeal, the issue of shareholder communications is tied in with other matters that have slowed the SEC’s move into the 21st century.

Corporations, for example, do not communicate directly with most shareholders but instead reach them through brokers and other intermediaries that technically hold the shares. Although Tuesday’s proposal does not change that reality, some business representatives expressed hope that it signaled a greater openness on the part of the SEC toward allowing companies easier access to their shareholders.

“We see this e-proxy proposal as part of a much larger picture that needs to be looked at,” the Business Roundtable’s Lehner said.