SEC Staff Reverses on Disney Proxy

Ballot Won't Include Nomination Initiative

SEC Chairman William H. Donaldson wants to change the corporate board nomination process before he leaves the agency. (Chris Kleponis -- Bloomberg News)

Staff members at the Securities and Exchange Commission reversed course this week and ruled that Walt Disney Co. could bar from its proxy ballot a union-backed initiative that would make it easier for shareholders to nominate corporate board members.

The switch, announced in a letter from SEC Division of Corporation Finance chief Alan L. Beller on Tuesday, focuses fresh attention on what has become the most contentious issue before the agency -- what role investors should play in choosing board members.

Late yesterday, the American Federation of State, County and Municipal Employees, which sponsored the resolution, said it would appeal the staff decision to the agency's five commissioners. AFSCME asked the commission to reconsider the issue or at least to direct staffers to explain clearly the reason for the turnaround.

Investor advocates, including several labor-sponsored pension funds, say giving shareholders more input in board elections could be the single most useful tool in reining in excessive executive pay and altering the clubby atmosphere that pervades some boardrooms. But trade groups including the U.S. Chamber of Commerce and the Business Roundtable staunchly oppose expanding shareholders' power to determine board composition.

The SEC move, which was reported in yesterday's editions of the Wall Street Journal, comes three weeks after the staff had said Disney should include the proposal on its 2005 proxy ballot. Disney said in correspondence with the agency that it planned to send ballots to the printer today.

Richard C. Ferlauto, director of pension investment policy at AFSCME, said the Disney case emphasizes the need for the SEC to act on a broader, year-old plan that would give shareholders more power to elect board members under limited circumstances. The plan has stalled. The Republican commissioners have objected to portions of the proposal; the Democratic commissioners support it, and agency Chairman William H. Donaldson is trying to strike a compromise. Donaldson told reporters earlier this month that there still is no consensus on the issue.

"Both investors and issuers are at a disservice until the SEC establishes what the rule is going to be for proxy access," said Ferlauto, whose pension fund controls about 32,000 Disney shares.

Time may be running out, since Democratic Commissioner Harvey J. Goldschmid, who has lobbied intensely for the change, will depart this summer to return to a teaching post at Columbia University. The term of another Democratic commissioner and proxy access supporter, Roel C. Campos, expires this summer. Donaldson has said he would like to see changes to the director nominations process before he leaves the agency in a year or so.

The SEC staff's move this week is unusual but not unprecedented. Earlier this year it reversed course on similar proposals floated by shareholders at Verizon Communications Inc. and Qwest Communications International Inc. The reversals highlight just how controversial and complex the issues are, experts said.

"This is the sort of invasion of power that companies are incredibly jealous of and very reluctant to even begin to allow to happen," said Paul Hodgson, senior research associate at the Corporate Library, which rates companies and boards on governance issues.

Hodgson said that Disney had recently made positive improvements to its annual and long-term executive pay plans in response to persistent complaints from investors but that its opposition to changes to director nominations was a disappointment.

It is unclear whether the Disney case will have broad impact on other companies. Martin Lipton, Disney's outside securities lawyer, did not return calls yesterday. In correspondence with SEC officials, he said labor groups had been trying to do an "end run" around the agency's rulemaking.

Lipton argued in a Dec. 13 letter that the SEC should not impose conditions on one company over "such a vital corporate governance matter" while the agency continued to deliberate the broader shareholder access plan.

"It's hard to interpret how far-reaching this is," said Amy L. Goodman of the Washington office of the law firm Gibson Dunn & Crutcher LLP, which represents several companies at which investors have lodged similar proposals. "The bottom line is, as with all shareholder proposals, it's very important to look at the specifics of each situation."