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A test for the SEC's chief

Christopher Cox is being forced out of his comfort zone to tackle a shareholder rights issue.

October 22, 2006|Jonathan Peterson | Times Staff Writer

WASHINGTON — In his first year as chairman of the Securities and Exchange Commission, Christopher Cox is widely credited with bringing accord to a panel that was bitterly divided over how aggressive it should be in policing corporate wrongdoing in the wake of Enron and other scandals.

The former Republican congressman from Newport Beach has shepherded a handful of reform-oriented measures without controversy, steering clear of proposals on which the odds of finding common ground appeared slim.

Now, however, a federal appeals court decision has tossed a grenade-like issue into the SEC's chambers -- putting Cox's diplomatic and leadership skills to their toughest test.

The court decision is forcing the agency to again confront demands to give shareholders a bigger say in the nomination of corporate directors. Former SEC Chairman William H. Donaldson unveiled a plan to do so in 2003, but it fizzled after triggering a partisan split on the commission and generating business opposition so fierce that many believe it contributed to Donaldson's departure.

Although the panel's makeup has changed, it is not clear that the group of three Republicans and two Democrats can take more than a cautious step to open up elections before exposing its own ideological differences. Nor is it clear that Cox is prepared to follow his predecessor in bringing up matters that force him to cast contentious, tie-breaking votes.

"Having a unanimous commission is ideal, and Chairman Cox has done an excellent job of building consensus," said Harvey J. Goldschmid, who left the SEC last year and is now a professor at Columbia University School of Law. "But on issues of this significance, doing the right thing is of far greater consequence than having a dissenting vote."

Goldschmid, a Democrat, believes regulators should make it easier for shareholders to nominate candidates for corporate boards and to have these nominees included in a company's official election materials.

For years, the SEC has allowed companies to reject such requests. In September, however, the U.S. Court of Appeals for the 2nd Circuit ruled that the agency was wrong when it allowed insurer American International Group Inc. to block such a resolution by the pension plan for the American Federation of State, County and Municipal Employees.

The court found that despite the SEC staff's routine rejection of such requests, the agency's policy statements on the matter had been contradictory.

Within hours of the ruling, the SEC said it would address the issue at an October meeting to make sure its rules were applied consistently.

But soon before the meeting last week, the SEC postponed the public airing until December.

"It's simply not soup yet," one official said.

Regulators now hope that in December they will be able to offer companies guidance on the issue.

More broadly, they are trying to write a rule that would give shareholders greater rights to place independent board candidates on the corporate ballot card.

In an interview, Cox expressed support for the basic principle that shareholders deserve a say in the corporate nomination process.

"The right of the owners of the company to choose the directors who represent them is fundamental," he said. "The Securities and Exchange Commission has among its significant responsibilities protecting that right."

The matter of moving beyond principle to a specific proposal is where the issue gets thorny and emotions get hot, and Cox declined to elaborate on his views.

For investor activists, including unions and public pension funds, the goal of nominating board members goes to the heart of shareholder democracy. Inside the executive suite, however, that same goal may be seen as an unwelcome effort by special interests to meddle in running the company.

Currently, shareholders who wish to oppose nominees that are handpicked by the company have little choice other than to withhold their votes or shoulder postage costs for a write-in revolt -- limits that place a heavy burden on all challenges.

In 2004, for example, the full-bore assault on Michael Eisner as chairman of Walt Disney Co. was deemed a big success when about 45% of shareholders withheld their support.

Cox, who as chairman of the House Committee on Homeland Security tried to smooth over differences between its Republican and Democratic members, has tried to keep schisms out of the five-member SEC, which was deeply divided before he took the helm in 2005.

Among the most divisive issues was the matter of shareholder rights to nominate directors. That measure prompted the biggest barrage of public comments, pro and con, in the agency's history.

Donaldson, a former Wall Street investment banker, was unable to win support among fellow Republicans, and business groups complained angrily about his proposal to the White House, which accepted his resignation.

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