A group of big public pension funds -- including California's $145-billion public employee pension system -- pressed federal regulators Tuesday to grant shareholders more power over the election of corporate directors.
The Securities and Exchange Commission "needs to create an effective rule to open up the nominating process that currently silences shareholder voices and allows corporations to handpick all directors," Gerald W. McEntee, president of the American Federation of State, County and Municipal Employees, said at a news conference in Washington.
"Now is the time to get corporate elections out of the back room and onto the proxy ballots, where they belong," he added.
Under current rules, shareholders who want to nominate a director without the support of management must stage a proxy contest, which requires them to publish materials, mail them to shareholders and solicit votes independently -- a process that can cost hundreds of thousands of dollars. Management, meanwhile, includes its director candidates on proxy statements that are prepared and mailed to shareholders at company expense.
The SEC has been working on a new rule that is expected to require companies to include shareholder-nominated candidates in company proxies, at least in some cases.
The idea has been opposed by business groups that contend that allowing easy shareholder access to corporate proxies could prove costly and unwieldy.
Companies are concerned on two major fronts, said Johanna Schneider, a spokeswoman for the Business Roundtable in Washington.
Executives worry that shareholders will elect one-note directors, who run on a platform aimed at changing one policy, such as executive pay or company pensions, but who would prove to be of little use in deciding other corporate matters such as strategy or auditing. They also worry that wide-open shareholder nominations could leave companies with as many director candidates as California has gubernatorial hopefuls.
However, institutional investors and investor advocates maintain that the ability to nominate directors is a key right since directors are the only representatives of a company's owners -- the shareholders.
"Too many board members at too many companies have failed to adequately fulfill their responsibilities and have not been acting in the best interests of shareholders," Connecticut state Treasurer Denise Nappier said. "When this happens, shareholders need a process that allows them to replace those board members. Access to the company's proxy ballot is the best mechanism to achieve this goal."
Added Sean Harrigan, president of the California Public Employees' Retirement System: "The fact that the SEC is pursuing a rule-making is a good first step. The right set of rules, which give investors an opportunity to nominate and elect more accountable directors, could become the crown jewel of corporate reform."
The SEC is expected to publish its proposed rules early next month, said Herb Perone, the agency's deputy director of communications. The agency wouldn't comment about the form these rules might take. Once published, the rules would be subject to a public comment period before they would take effect.
AFSCME's McEntee said he wanted to press the issue because pension managers were hearing disturbing rumors about the form the proposed rules might take.
The SEC reportedly plans to allow shareholders to nominate directors only after certain "trigger" events at a company, said Rich Ferlauto, AFSCME's director of pension investment policy. These triggers, which might include the board's consistently failing to implement shareholder-passed proposals, could prevent shareholders from taking prompt action in a company crisis, institutional investors say.
AFSCME, which manages a $500-million pension fund, wants the proposed rules to take effect quickly -- in time for the 2004 proxy season.
"We cannot afford to let another election cycle occur without them," McEntee said, "and neither can the rest of the country."