States, Money Managers Behind SEC Governance Reforms

May 28, 2004 ( - A number of institutional investors and state officials back the U.S. Securities and Exchange Commission's (SEC) recent proposals to give shareholders more power to nominate corporate board directors, but business leader are leery.

Nearly 80% of the 129 buy-side portfolio managers polled said the move would be a good step toward better corporate governance.   Further, approximately three-quarters of the money manager respondents believed that the board structures of mutual funds are in need of reform, according to a survey conducted by Broadgate Consultants, Inc.

However, division was detected in the extent of the governance proposals intentions.   Forty-one percent of the money managers canvassed said U.S. companies should adopt corporate governance models that are designed to balance the needs of constituencies beyond shareholders, while nearly half disagreed with the statement.   Additionally, m ore than one-third of survey respondents believed the push for governance reform has gone too far, and now risks undermining the credibility of its supporters.

“While the degree of reformist activism among America’s institutional investors ranges widely, one thing is clear: they strongly support further governance reforms, and not only in the corporate boardroom but in their own ‘backyard’ as well,” said Thomas C. Franco, Chairman and Chief Executive Officer of Broadgate Consultants.

“United” States

At the same time, the San Jose Mercury News reports investment officials from California, Connecticut, Iowa, Kentucky, Maine, New Jersey, New York state, New York City, North Carolina, Oregon and Vermont have called on the SEC to formally adopt a rule giving large shareholders the right to nominate their own candidates for corporate boards of directors.  California Treasurer Phil Angelides said during a conference call that officials felt state the increased pressure on the SEC was necessary due to the state’s deep “concerned about the massive and frenzied lobbying effort” by pro-business groups to block the rule.

Under the rule, first proposed by the Commission last fall, companies could be required to include up to three candidates nominated by shareholders, if certain conditions are met (see  Both Sides Unsatisfied With SEC Dissident Director Proposal ).   Shareholders could only require the board to place shareholder-nominated candidates on the proxy if 35% of shareholders had withheld votes from a board-nominated candidate the previous year.   Or, under an alternative condition, a majority of shareholders would have to vote to allow shareholder-nominated candidates on the proxy in the coming year. If either condition is met, only long-term shareholders holding at least 5% of the stock could nominate a candidate that the board would have to place on the proxy ballot.

True to the states’ concerns, business leaders are concerned about the proposal.   The Business Roundtable, group representing 150 large companies, said such a move gives a small segment of “special-interest shareholders” the ability to push an agenda forward that might not be in the interests of all shareholders.   Thus, corporate boardrooms across the country would be ineffective as warring factions each try to further their own interests.

Institutional investors polled by Broadgate showed some concern as well.   Nearly four out of 10 (37%) thought that public pension funds are attempting to wield too much power.   As evidence of this trend, the money managers point to the California Public Employees’ Retirement System (CalPERS) recent crusade to oppose corporate directors at 2,700 companies (See  Activist Funds Set Governance Sights on Safeway ).