SEC Turns Back Shareholder Proposals on Director Nominations
Critics say decision limits challenges to insular corporate boards
By James Hyatt
The U.S. Securities and Exchange Commission (SEC) rejected “proxy access” proposals Nov. 28, delighting corporate officials and dismaying shareholder activists and some influential members of Congress.
By a 3-1 vote, the commission declared that companies could block shareholder proposals seeking to nominate directors without drawing SEC criticism. At the same time, the commission moved to encourage “electronic shareholder forums” by declaring that participants in such forums wouldn’t be viewed as soliciting proxies and that shareholders or companies operating such forums wouldn’t be liable under federal securities laws for statements made there by third parties.
The SEC took no action Nov. 28 on a proposal to limit nonbinding shareholder resolutions.
The SEC set off the furor earlier this year by concocting a stew of proposals--some of them contradictory--that Chairman Christopher Cox wanted to resolve in time to prepare for the 2008 proxy season.
The debate was made more complicated by changes in the SEC’s membership. By law, the commission can have no more than three of its five members from the same political party. Democrat Roel Campos has resigned, while Democrat Annette Nazareth’s term has expired and she has asked not to be renominated.
Shareholder activists and leading Democrats in Congress had urged that the SEC take no action until the vacancies are filled.
Rep. Barney Frank, a Democrat and Chairman of the House Financial Services Committee, declared: “I am disappointed by the Commission’s action today to restrict shareholder access to company proxies. The amendments to the Commission’s proxy rules will leave shareholders with inadequate recourse to influence insular boards that are unresponsive to shareholder concerns, by effectively precluding shareholders from proposing changes to director election procedures. I believe the commission should have waited until it was at full membership and was able to deal comprehensively with the issue of proxy access… Today’s vote is a step backwards for shareholders,” particularly in view of the “thousands of comments received in opposition to the rule.”
And Sen. Christopher Dodd, also a Democrat and Chairman of the Senate Banking Committee, commented: “The Chairman [Mr. Cox] has said that he intends to revisit this issue in the new year and I will hold him to his word. I believe that shareholder proxy access needs to be thoroughly reviewed and other options explored to ensure that the Commission is not undermining investors’ rights and to promote the stability, competitiveness and growth of our financial markets.”
SEC Commissioner Nazareth, who cast the only negative vote, said the decision “stands in the way of shareholders’ rights to elect the directors of the companies they own. I do not see a principled way to vote for the non-access release and claim to be supportive of shareholder rights in the longer term. Indeed, if this amendment were truly intended to be a temporary stopgap measure, then it would have a sunset provision. It does not.”
The SEC decision won’t be the last word on shareholder access. Richard Ferlauto, Director of Corporate Governance and Pension Investment at the American Federation of State, County and Municipal Employees called the decision “ill-considered and substantially flawed. It will not stand up to a legal challenge.”
He said the AFSCME pension plan and others have filed binding bylaw amendments to establish proxy access procedures at Bear Stearns and JPMorgan Chase “because of our concerns regarding the mismanagement of subprime credit issues and risk exposure among the financial companies that we own.”
The SEC’s comment files were overflowing in response to the then-pending proposals. The proposal to limit shareholder resolutions received more than 24,000 comments, most of them form letters, while the proposal on election of directors drew almost 8,000 comments. It is obvious that a November decision would seem like Halloween to some groups and Christmas to others.
“Unless you have been living in a cave, with no access to the outside world, you must be aware of the lack of honesty, ethics and morals that are prevalent in the vast majority of large corporations. It has been the shareholders, not the CEO’s, and executives, who have been able to improve the honesty of the corporations,” exhorted letter writer William Drake, joining the activists’ argument.
Taking the other side, few comments were more acerbic that those of corporate law firm Wachtel, Lipton, Rosen & Katz, which argued that activists seeking proxy access want to impose a “shareholder-centric”model of governance--an agenda backed by “for-profit governance advisors and tenured academics” with “no direct stake in the success or failure of American business or American capital markets.”
It added: “These two groups have the least real-world experience of anyone involved with corporate governance, and are the least accountable players in the corporate governance arena.” And, the firm declares, “no real-world crisis has shown that the current system needs radical revision.”
The Council of Institutional Investors, representing more than 130 corporate, union and public pension funds with more than $3 trillion in assets, endorsed shareholder access to proxy materials but argued that the 5 percent ownership threshold would be very difficult to meet. “Our preliminary research indicates that even if the 10 largest public pension funds were to aggregate their holdings of a single public company’s securities, those funds combined would likely be unable to clear the 5 percent hurdle,” the group said.
On the other hand, The Investment Company Institute, the mutual fund industry’s trade group, endorsed giving shareholders some say in nomination of directors but suggested they’d need to hold even more than a 5 percent interest for longer than a year, to prove long-term investment intentions.
While shareholder access to the corporate nominating process has drawn much of the public discussion, the SEC’s questions about limiting nonbinding shareholder resolutions particularly alarms corporate social responsibility groups. The SEC’s meeting Nov. 28 didn’t address that issue.
The SEC, for instance, asked whether companies should be able to adopt bylaws that would ban nonbinding shareholder resolutions. Such a rule “could virtually eliminate shareholder resolutions,” warns investment firm Domini Social Investments. The Oneida Tribe of Indians commented, “The most unresponsive companies would be most likely to opt-out because resolutions are an important mechanism to strengthen corporate accountability. Additionally, enabling companies to opt-out would result in an uneven playing field with some companies allowing resolutions and others prohibiting them.”
A group of 47 institutional investors and service providers, with $1.4 trillion in invested capital, said the SEC’s questions about treatment of nonbinding shareholder proposals raised “dramatic, and deeply troubling” implications. Permitting companies and shareholders to set the rules for submission of nonbinding resolutions “would not serve the public interest or the goal of investor protection,” the group said, but instead would “merely serve to insulate certain companies from a highly effective mechanism for corporate-shareholder communications, and render these entities less accountable.”
The Business Roundtable, representing chief executives of leading U.S. corporations, noted that shareholders with a token investment can require companies to devote considerable resources to dealing with nonbinding resolutions, and urged that the investment required to make such proposals be increased significantly.
And it urged that shareholders not be able to resubmit proposals that receive less than 10 percent of votes the first time, less than 25 percent the second time, and less than 40 percent the third time, and that proposals be excluded for five years if they haven’t been approved after three submissions.