Federal regulators are approaching a showdown over a plan to give shareholders far greater ability to oust corporate board members.
Since the Securities and Exchange Commission made its formal proposal in October to allow shareholders to put their own candidates on corporate proxies, chief executives and business groups have lobbied furiously against the proposal, urging commissioners to abandon the plan or at least take more time to consider it.
Institutional investors and shareholder rights advocates are pushing just as hard in favor of the idea, although there is widespread discontent about the minimum share of holdings and events required to activate the process at a company.
The SEC has received more than 12,000 letters on the proposal, including more than 11,000 form letters from proponents. While the majority of the letters favor the plan’s concept, many express concern that the necessary standards are too onerous.
The issue is shaping up to be one of the most contentious at the commission since the divided vote in 2002 to approve William Webster as head of the new accounting oversight board. Webster has since resigned.
Some at the SEC, including Chairman William Donaldson, are pushing to have final rules in place for this spring’s proxy season, because creating access would be a multiyear process. Democratic Commissioner Harvey Goldschmid, in particular, has spoken out about bringing the plan to a vote in February.
But the SEC also has laid out an ambitious schedule to consider a series of proposals that address the mutual fund scandals.
The agency has planned two meetings in February and one in mid-March, but the greater emphasis on problems in the mutual fund industry could delay action on the proxy issue. Spokesman John Heine said the SEC still could take up the proxy matter next month.
In expressing opposition, many business leaders have urged the SEC to take more time to consider the plan, and SEC Commissioner Paul Atkins, a Republican, has said he favors a more deliberate approach. Fellow Republican Commissioner Cynthia Glassman also has expressed reservations.
The proposal would allow shareholders owning 5 percent of a company’s stock for at least a year to nominate candidates for contested elections after a “trigger” is met–either more than 35 percent of votes are withheld for a management candidate, or shareholders pass a resolution to allow nominees.
Given the support of Donaldson and the two Democrats on the five-member SEC, many experts say change is coming, sooner or later.
“I don’t think there’s any doubt about it. I think it is inevitable,” said C. Warren Neel, executive director of the Corporate Governance Center at the University of Tennessee and a longtime corporate board member himself.
“The question is, what form is it going to come in?”
Much of the dispute has centered on the triggers: Proponents claim the hurdles to nominate candidates are too high–the 35 percent withheld vote could be especially difficult–but many opponents claim they’re far too low.
Opponents also claim that state law drastically limits SEC authority in this area and that there’s scant evidence that such a proposal is warranted.
“The SEC offered little concrete evidence to support [the] rule beyond anecdotes, general impressions and unsupported claims,” former Enron Corp. director Wendy Gramm and a George Mason University colleague wrote to the SEC. “We cannot escape the stubborn fact that there is little evidence that the regulation as it is proposed will have any benefit.”
Execs lobby against plan
The Business Roundtable, a group of big-company chief executives, filed 76 pages of detailed comments with the SEC, plus hundreds of pages of other material. It also is part of a coalition of influential business groups backed by the U.S. Chamber of Commerce that has lobbied against the proposal.
Among the objections: Well-qualified board members will bow out rather than subject themselves to an election fight.
Neel said fellow directors, particularly on large-company boards, have begun to discuss that concern and other related issues.
He said he has no fears about being challenged for a board seat–he’d want to know if shareholders are unhappy with his performance–but predicts former politicians and other prominent directors indeed might step aside in the face of a shareholder challenge.
But such fears are outweighed by the benefits, proponents argue.
“The adoption of the proposed rules would improve director performance, independence and accountability to shareholders,” a group of 38 public pension fund leaders, including the executive director of the Illinois Teachers’ Retirement System, told the SEC. They said they “would greatly benefit from stronger director voices at troubled and unresponsive companies.”
Other objections include concerns the plan would spawn a plethora of single-issue candidates who would be disruptive to effective board functioning and an underlying view that such a system would do little to prevent corporate scandals.
In short, some opponents say, the system isn’t really broken.
Henry McKinnell, the CEO of Pfizer Inc. and chairman of the Business Roundtable, told the SEC it is addressing “a perceived problem that is only vaguely identified and wholly unsubstantiated.”
Pshaw, say proponents.
Shareholders wouldn’t elect single-issue candidates, they say. Claims that the system wouldn’t prevent massive failures are merely reason to provide immediate access to “very substantial shareholders to respond with appropriate speed to redress urgent and egregious problems,” James Heard, CEO of the Institutional Shareholder Services, told the SEC.
A daunting process
Several experts have said the triggers may well prove daunting, but defeating a candidate with full management backing would be even more difficult.
“It’s a step in the right direction. We’re not going to see enough new board members initially,” former SEC Chairman Arthur Levitt said in an interview. “It’s a clear signal both to institutional America and the boards and managements themselves that composing the board can no longer be a family affair.”
Levitt and others said a likely outcome of any new rules is that the mere threat of a contested election could bring about change–or at least get shareholders and management to hold serious talks.
“Even if triggering events were rare in practice, we believe that the proposed rules would create a more productive behind-the-scenes negotiation between long-term shareholders and the board in the selection of candidates,” a group of 15 Harvard law and business professors wrote to the SEC.
Indeed, a process to have management and shareholders work jointly to select new candidates has been installed at several firms via shareholder litigation settlements.
Regardless of the specifics of any new rules, serious, long-term shareholders are likely to see their influence grow, Neel said.
“I think they’re going to be listened to.”
