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SEC Split on Aiding Investor Challenges

The plan is criticized as being narrow in scope and potentially sparking disruptive campaigns.

March 08, 2004|Jonathan Peterson | Times Staff Writer

WASHINGTON — The outburst of shareholder ire at Walt Disney Co. last week did more than cost Michael Eisner his job as board chairman.

It also increased pressure on the Securities and Exchange Commission to move ahead with a plan to give investors a louder voice in elections throughout corporate America.

"You couldn't come up with a more graphic example of why it's needed," said Patrick S. McGurn, senior vice president of Institutional Shareholder Services, which advises pension funds and other major Wall Street investors.

The SEC measure would make it easier for big investors to mount dissident campaigns for the board, using a company's official election materials in the quest.

That would be a sharp departure from the traditional state of affairs in which unhappy shareholders have little choice but to withhold their votes, as they did at Disney, or to mount costly, independent challenges, as Disney dissidents Roy E. Disney and Stanley P. Gold are mulling.

In proposing a change, federal regulators have sparked the largest outpouring of public comment in the agency's history -- more than 13,000 letters, most supporting the change or pushing regulators to go further.

Moreover, the proposal has exposed a deep partisan divide among the five members of the usually collegial SEC, and brought dire warnings from corporate America that companies would face a disruptive barrage of shareholder revolts.

"I've never seen a more sharp and more emotional debate between corporations and shareholders," said Richard H. Koppes, an attorney with Jones Day in Sacramento and Los Angeles, and former general counsel at the California Public Employees' Retirement System, one of the groups that turned thumbs down on Eisner.

Under the proposal, which is backed by SEC Chairman William H. Donaldson, large shareholders who surmount a series of hurdles would for the first time get the right to place names of board candidates on company mailings and ballots.

The challenge could begin, for instance, if at least 35% of the shareholders withheld their support from a board candidate during an election -- a test more than met at Disney, where the tally to withhold for Eisner reached 43%.

Alternatively, a shareholder group owning 1% of the stock could propose a challenge, and that proposal would need to win a majority of shareholder votes. Either way, the following year, investors representing 5% of the company's stock could put candidates on the official corporate ballots.

"If there is a better idea out there, we want to know about it," Donaldson told a legal audience in Washington on Friday, according to a copy of his prepared remarks.

He referred to the SEC approach as "measured" and a "middle ground" that would limit challenges to companies where they were truly needed.

The middle ground has proven to be a relatively narrow terrain, with vehement detractors on all sides.

Many shareholder activists, including large pension funds, labor unions and state treasurers, complain that the SEC plan doesn't go far enough. They say it sets excessively high standards to trigger a vote and disenfranchises smaller owners. Another complaint is that it could take a year or more to reach a vote, allowing grievances to go unanswered.

"It's ridiculous that corporations feel so threatened by this when it's such a modest proposal," said Tracey Rembert, coordinator of the Shareholder Action Network.

For their part, corporate executives warn that it would unleash a torrent of disruptive challenges, often by investors whose goals may be far more narrow than the mass of shareholders. The supposed rash of contests, they contend, would eat up time from executives -- time better spent on running companies in the best interests of the majority of investors.

"We think it would hit hundreds and hundreds of companies, including those with the highest standards of corporate governance," said John J. Castellani, president of the Business Roundtable, which is spearheading opposition to the plan and represents the corporate establishment.

In response to the extraordinary public reaction, the SEC in February took the unusual step of inviting more comments and scheduled a special round table for Wednesday.

Two of the SEC's three Republicans remain wary of the plan. The two Democrats support it. Donaldson, the GOP chairman, could cast the tie-breaking vote in favor but is struggling behind the scenes to design a final rule that can win over his fellow Republicans.

Advocates once expected to have the rule in place for the season of annual meetings which has just begun and runs into June. They are still hoping to approve a rule soon after the March round table.

"This is in the shareholders' interest but also in the nation's interest," said SEC Commissioner Harvey J. Goldschmid, a Democratic backer.

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