Investors fail to get broader powers
Companies will continue to have broad authority to block investors from playing a bigger role in electing members of corporate boards, federal regulators ruled Wednesday.
The 3-1 vote by the Securities and Exchange Commission drew rebukes from investor activists, who say average shareholders are virtually powerless to deal with board members who aren’t looking out for their interests.
“Responsible management need not fear its shareholders,” said Commissioner Annette Nazareth, who cast the lone dissenting vote. “I am obviously disappointed.”
SEC Chairman Christopher Cox defended the vote, which he said upholds a long-standing policy in which companies have the right to block placement of shareholder election resolutions on their corporate ballots.
Cox said he remained committed to establishing new rules that would give shareholders a greater voice in corporate elections. Wednesday’s vote was required, he said, because of a 2006 appellate ruling that could lead to inconsistent standards for board elections in different parts of the country and jeopardize certain investor protections.
“Today is not the end, and I hope all stakeholders will continue to work with us,” Cox said. He added later that he expected to “move forward and reopen this discussion in 2008.”
Shareholders typically have little ability to influence the director nomination process other than to mount maverick, out-of-pocket campaigns.
Opponents of expanding such rights, including access to corporate “proxy” election materials, contend that groups with narrow agendas could end up with undue influence. They say other reforms, such as the increasing number of independent directors, make the election proposals unnecessary.
“Simply put, proxy access is a bad idea whose time passed,” John J. Castellani, president of the Business Roundtable, testified before Congress in September.
But advocates maintain that such powers would help ensure that directors stay accountable to shareholders and perform their role as watchdogs, rather than fall under the sway of high-powered executives.
“Chairman Cox caved in to political pressure to take away a fundamental investor right,” AFL-CIO President John Sweeney said in a statement, adding, “This rule comes at a time when the need for strong, independent corporate directors and a vigilant SEC is more critical than ever.”
The issue has sparked a barrage of more than 34,000 letters to the SEC, officials said Wednesday.
Shortly after the vote, officials at the American Federation of State, County and Municipal Employees said they were filing election resolutions for 2008 at Bear Stearns and JPMorgan Chase, companies that they said had mismanaged mortgage-related matters.
Richard Ferlauto, director of corporate governance and pension investment at AFSCME, said that the union’s pension fund and allies also planned to file further resolutions and that they would press them in the courts if necessary.
“We take these actions with regret and only because Chairman Cox chose this controversial course to subvert important shareholder rights,” Ferlauto said.
The union helped spark the current debate by pushing for an election resolution at AIG, which the company rejected.
In 2006, the U.S. Court of Appeals for the 2nd Circuit ruled that the SEC’s practice of taking no action when companies blocked shareholder election proposals -- in effect since 1990 or earlier -- was not consistent with earlier SEC policy and was therefore invalid.
A more recent Supreme Court decision on another case seemed to tilt the other way, SEC officials said Wednesday.
Cox said Wednesday that the SEC vote would protect investors by erasing uncertainty and guaranteeing that the regulatory body’s antifraud and disclosure standards for board elections remained in place. “We owe it to investors and the markets to at least ensure that this does not happen.”
But Nazareth was not convinced. “I don’t believe we’re in a state of great uncertainty,” she said, noting that last year there were only three such proxy proposals.
Nazareth also expressed uncertainty about whether the SEC vote was a stopgap or a more lasting policy.
Democrat lawmakers, including Sen. Christopher J. Dodd (D-Conn.), who is chairman of the Senate Banking Committee, had urged the SEC to hold off action until it has its full complement of Democratic members. One Democratic seat on the panel is vacant, and Nazareth has announced her intention to leave in the near future.
“The result of today’s vote is a step backwards for shareholders, as evidenced in part by the thousands of comments received in opposition to the rule, primarily from those representing shareholder interests,” Rep. Barney Frank (D-Mass.), chairman of the House Committee on Financial Services, said in a statement.