Both Sides Unsatisfied With SEC Dissident Director Proposal

October 9, 2003 ( - The US Securities and Exchange Commission (SEC) has given a tentative approval to a controversial plan to make it easier for shareholders to install directors on public company boards.

>The SEC’s unanimously approved process sets out a two-year procedure in order to conduct an outside board election, the Associated Press reported.   In the first year, more than 35% of the company’s shareholders would have to withhold votes in protest from the board’s nominees or a shareholder or group of shareholders that has held more than 1% of company’s stock for at least a year would have to formally request a contested election. A majority of the total votes cast would have to support the request.

>Not just anyone could pull off such an election. The shareholder or group nominating directors – as many as three at companies with larger boards and one at those with smaller boards – would be required to have owned more than 5% of the stock for at least two years. The nominated candidates would have to be independent, with no financial ties to the shareholder groups putting them forward and the election featuring those proposed board members would take place in the second year.

>However, neither side of the issue was very happy with the SEC’s action designed as part of regulators’ effort to institute more board independence in order to end what many viewed as an era when directors routinely rubber stamped management’s decisions.

Pension Discontent

>Representatives of the biggest US pension funds insist in a letter to SEC Chairman William Donaldson that the plan doesn’t go far enough because it effectively erects too many walls that must be scaled before shareholders can nominate directors – a maximum of three – as part of a two-year process. As it now stands, the proposal too heavily favors company executives, the pension executives argue.

“We are troubled that this opportunity for meaningful and lasting reform may be squandered,” said the fund officials who control more than $640 billion in eight states. “Our understanding of the current proposal is that it is excessively restrictive, going well beyond deterring frivolous nominations and preventing abuse by corporate raiders.”

>The California Public Employees’ Retirement System (CalPERS), the nation’s largest public pension fund, issued a separate statement Wednesday echoing that sentiment. “We share their goal of creating appropriate rules to deal with the worst cases of directors who blatantly fail to respond to shareowners,” said Sean Harrigan, President of CalPERS Board of Administration. “While this is a good first step, we intend to offer further ideas to strengthen the rules’ effectiveness.”

>On the other side, many chief executives are likewise less than bowled over with the SEC’s action. Opponents – including the Business Roundtable, representing chief executives of the biggest corporations – maintain that the move would bring chaos in the board room, give special interests undue influence over company policy and force companies that govern themselves stringently into board takeover contests.

>But the SEC insists it has come up with a proposal that would affect only companies that govern themselves deficiently and would not give naysayers with special agendas an unfair springboard onto corporate boards.

>According to Donaldson, the proposal would directly benefit shareholders “while carefully and thoughtfully balancing concerns about proper management and operation of our public companies.”   The proposal was crafted to avoid the election of “special-interest” directors beholden to the shareholder groups that nominated them, by requiring evidence of significant investor dissatisfaction with the company and nominated directors’ independence from the groups, said Alan Beller, director of the SEC’s corporation finance division.

>Although two of the SEC commissioners expressed reservations at a public meeting, the panel tentatively adopted the plan, voting 5 to 0 to open the proposed rules to public comment for 60 days. If they are finally adopted, contested board elections could not take place under them until spring 2005.

Under current rules, shareholders are allowed to nominate candidates for director, but they cannot put a nominee’s name in the company’s official ballot material – the proxy – that is mailed to investors. That makes it expensive and difficult to mount a campaign for alternate candidates.