Mr. Donaldson's Next Move
Monday, June 28, 2004; Page A20
THE SECURITIES and Exchange Commission did the right thing when it voted Wednesday to make the boards of mutual funds more independent. These boards theoretically represent the individuals who put money in the funds: They are supposed to negotiate what fees to pay investment managers, and to police the potential rip-offs that loom when unsuspecting folk entrust the care and nurture of their cash to a handful of complete strangers. Until now, the mutual fund board members have been mainly people who work for the investment firm that manages the money; Fidelity Investments (to take one well-known example) has been negotiating with itself about what fees might be reasonable. Thanks to the SEC's new rule, Fidelity's money managers will now negotiate with a mutual fund board that's headed by a non-Fidelity chairman and that draws three-quarters of its members from outside the firm. This won't prevent all abuses of mutual funds, but it is a step in the right direction.
It is also a good precedent. For the past several months, William H. Donaldson, the SEC chairman, has been weighing another tough question: How much opportunity should shareholders of corporations get to put their own candidates up for election to boards of directors? Just as has been the case with mutual fund governance, the SEC has been divided 2 to 2, with the Democratic commissioners favoring stronger rights for investors and shareholders, while Republican commissioners have resisted. This gives Mr. Donaldson the swing vote -- a power that he rightly used to back mutual fund reform. But he has been leery of doing the same on the rules governing the boards of public companies. He must now summon up his courage.
At the start of this debate on corporate governance, the SEC proposed a modest but sound rule: If 35 percent of shareholders withhold their support for a board-selected candidate to serve as a director, then shareholders get the right to put their own candidate up for election the following year. This would not usher hyper-democracy into the boardroom: At nearly all companies, boards (and the chief executives that tend to dominate them) would continue to have a monopoly on nominating candidates for directorships. In the small number of companies that are sufficiently poorly managed to trigger a revolt among 35 percent of the shareholders, a non-CEO-backed candidate could stand for election, though he or she would have no guarantee of winning. The chief result of this new rule would be that large institutional shareholders -- especially the nation's corporate-governance-minded public retirement funds -- would gain a new tool to pressure managers. Companies that pay top executives lavishly despite mediocre performance would be the prime targets.
It seems hard to imagine that an objective observer could oppose this proposal. Shareholders are the owners of public companies, after all. But the SEC has been lobbied noisily by a powerful group of observers who are not objective. The nation's CEOs resent even modest challenges to their authority in the board room. Mr. Donaldson understandably would rather avoid casting a deciding third vote that angers this constituency. But before the chief executives lobbied him, he was clear in his support for this measure, and in a recent speech he repeated that managers exploit the current system to ignore shareholder protests when they mishandle their companies. Mr. Donaldson's original proposal is modest. He should avoid diluting it, and he should vote his principles.
© 2004 The Washington Post Company