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SEC offers conflicting shareholder proposals

Business groups lean toward one. Activists fear neither would help them gain a say in nominating directors.

July 26, 2007|Jonathan Peterson | Times Staff Writer

WASHINGTON — The Securities and Exchange Commission on Wednesday voted to propose competing measures regarding the rights of shareholders in the election of corporate directors, leaving a long-contentious issue in the air.

Corporate governance activists including unions and public pension funds expressed disappointment with both proposals, while business interests appeared inclined to support the measure that would not give shareholders much of a voice in nominating directors.

The contradictory votes underscored differences at the SEC on the issue and suggested that the agency would find it hard to reach a decision on the matter.

"Right now there isn't a consensus on the commission of what to do," said Amy Goodman, an attorney at law firm Gibson, Dunn & Crutcher and a former SEC staff member.

In a bid to stir debate, SEC Chairman Christopher Cox, a Republican former congressman from Orange County, supported both measures, each of which passed 3 to 2.

One proposal, which gained the unenthusiastic votes of the commission's two Democrats, would allow investor blocs owning at least 5% of the company for at least a year to propose changes to a company's bylaws that would allow shareholders to nominate directors.

The other measure, supported by the panel's Republicans, would generally exclude such proposals.

The measures will be subject to public comment for 60 days. Cox has said he wants to resolve the issue this year.

Currently, investors have little chance to nominate directors other than to pay for unauthorized campaigns using unofficial election materials. In 2003, then-SEC Chairman William H. Donaldson unveiled a complex plan to give shareholder blocs use of official corporate ballots. But the initiative, which was backed by the commission's Democrats, stalled amid opposition from business groups that said it would empower special interests and conflict with state laws.

The issue remained dormant until a court decision last September forced the agency to clarify its policies, leading to the current rule-making effort.

While distancing himself from Donaldson's ill-fated effort, Cox on Wednesday sought to find a middle ground between investor activists who have long sought greater rights and management advocates who oppose them.

Blanket hostility to a shareholder voice "would seem to stand the principle of fair corporate suffrage on its head," Cox said. But he added, any rule changes should be "cautious and measured."

Investor activists expressed little support for even the proposal that would in theory make it easier to seek a bylaw change, saying it would be extremely difficult to put together a bloc of 5% of a company's owners.

"It's very hard to get to that level," said Amy Borrus, deputy director of the Council of Institutional Investors. "For our members who file proposals, a 5% threshold is unworkable."

Business groups, on the other hand, said 5% was too low.

"You could potentially have 5% trying to dictate a change of bylaws to the entire corporation -- and philosophically we just don't believe that's a good idea," said Tom Lehner, director of public policy at the Business Roundtable, an alliance of major U.S. corporations.

"We continue to believe that the proxy process should not be open to special interests," he said. "Now more than ever, it's important that corporate boards work productively on oversight and accountability -- and are not fractured and dysfunctional."

Cox said he voted for both proposals to encourage the submission of comments.

But Democratic Commissioner Annette L. Nazareth said she was "extremely concerned" by the uncertain direction.

In a separate action Wednesday, the SEC endorsed a move by the Public Company Accounting Oversight Board to ease an auditing requirement under the Sarbanes-Oxley corporate governance law. The new rule allows auditors to focus on transactions most likely to cause errors in financial statements.

The SEC also agreed to consider whether U.S. companies could use international rather than U.S. accounting standards in preparing financial reports. The agency already had proposed allowing foreign companies whose shares trade in the U.S. to use the international standards.


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