A New SEC to Reopen Board Elections Issue
The Securities and Exchange Commission is again confronting the issue that nearly tore it apart two years ago: the right of shareholders to nominate candidates in corporate board elections.
Former SEC Chairman William H. Donaldson tried to establish a means for large blocs of shareholders to place nominees directly on corporate ballot cards. But his plan was shelved amid fierce resistance from two fellow commissioners and the business community.
The matter has been brought back to the forefront by a federal appeals court ruling Sept. 5, which said SEC staff improperly allowed American International Group Inc. to block a measure that would have made it easier for investors to nominate their own candidates for the board.
The court decision “kind of put it back on the commission’s plate,” said Martin P. Dunn, deputy director of the SEC’s division of corporation finance.
The commission that plans to take up the matter Oct. 18 is significantly different from the one that deadlocked over the Donaldson plan.
Donaldson has been replaced as chairman by Christopher Cox, the former Republican congressman from Newport Beach who has worked to build consensus on the five-member panel. In addition, a Republican opponent of the Donaldson plan, Cynthia A. Glassman, has been replaced by Kathleen L. Casey, a former congressional staffer whose approach to the issue is not clear.
The Democratic commissioners support the goal of shareholder access, setting up Cox as the potential swing vote on the panel, which has three Republicans and two Democrats. Cox isn’t tipping his hand, and he was not available for an interview late last week.
The commission has several possible paths.
One would be to endorse the approach of its staff, which has been to allow companies to deny shareholders access to corporate election ballots. Experts said the court would be satisfied with the approach as long as the SEC came up with a clear and consistent rationale.
Or the commission could give the staff discretion to grant shareholder access to ballots on a case-by-case basis.
Alternatively, the SEC could seek to resurrect a contentious plan creating a nationwide procedure for shareholders to put their own candidates on corporate ballots.
Such a right “is the Holy Grail of corporate board reform,” said Richard Ferlauto, director of pension and benefit policy at the American Federation of State, County and Municipal Employees, whose pension plan had pressed the matter at AIG. “Throughout the history of the [SEC], shareholders have sought the ability to directly nominate. It’s really about how you’re going to balance the power between company management and company owners.”
Business interests, however, contend that it could give narrow interests undue influence over companies by allowing them to take control of corporate boards.
Currently, investors are allowed to nominate board members, but they typically must shoulder the costs of postage and election materials -- large expenses that discourage independent challenges.
The proposal by AFSCME’s pension fund would have allowed shareholders owning 3% of shares for a year to put their own candidates on the corporate board ballot.
Without taking sides on the underlying philosophical issue of shareholder rights, the U.S. 2nd Circuit Court of Appeals found that the SEC staff had not been consistent in its rulings on such requests, and it in effect tossed the matter back to the agency.
Still, large obstacles could stand in the way of a sweeping rule overhaul and push regulators toward a more limited response to the court.
One is the calendar. Cox has said he wants to clarify the matter in time for the 2007 corporate meetings, leaving limited time to jump-start a potentially controversial rulemaking process.
“A lot of people are hoping the SEC will open up the whole debate on ballot access. But given the timetable, it’s more likely they’ll hammer in place” their current approach, said Patrick McGurn, executive vice president of Institutional Shareholder Services, a proxy advisory firm in Rockville, Md.
Beyond that, powerful interests are lobbying against change. In the weeks since the court decision, the Business Roundtable, which represents large corporations, has visited the SEC’s glass tower in Washington twice to make its case.
Corporate opponents of greater shareholder rights to nominate board members contend that changing the longtime practice runs the risk of politicizing company elections in a way that would be harmful while distracting directors from their fundamental duties.
“You don’t want to see board members so preoccupied with contested elections that they stop minding the store,” said Thomas J. Lehner, director of public policy at the Business Roundtable.
Cox has made a point of seeking middle ground on potentially contentious issues during his one-year tenure as chief regulatory cop. Advocates of shareholder rights, who initially viewed his appointment with concern, are hoping he will stick to a conciliatory course in responding to the court decision.
“Cox has done a pretty good job in the past year, and the business community is asking him to blow himself up,” said Damon A. Silvers, associate general counsel for the AFL-CIO.
AFSCME’s Ferlauto maintains that shareholders have an established right to pursue election resolutions at annual meetings, and that a reversal by Cox would be a major mistake: “I don’t think he would want that black mark on his legacy.”
Whether Cox can navigate the middle ground is unclear. The Business Roundtable’s Lehner said the environment had changed in important ways from a few years ago, weakening the argument for election changes. He cited such changes as stricter rules on disclosure of executive compensation and a proliferation of majority-vote requirements in board elections, another goal pushed by activists.
“Boards have become, as they should, much more active and much more vigilant in overseeing management,” Lehner said.
Corporate critics say the stock options scandal and allegations of misconduct at Hewlett-Packard Co. dramatize the need to make boards much more effective watchdogs.
“What leaps out at you across all these boards is that they need some strong, independent voices,” Silvers said.
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