SEC Proposal Raises Profile Of Investors

Regulators yesterday issued a proposal that could offer investors a greater voice in how public companies are governed, potentially handing them more power over such fundamental issues as who sits on corporate boards and how executives are paid.

A divided Securities and Exchange Commission acted after a federal appeals court threw into question a long-standing policy that has allowed companies to keep critical shareholder resolutions off of proxy ballots.

For years investor advocates have clamored for a greater say in how board members are elected as a way to attack outsized executive compensation and a clubby atmosphere that they say allows fraud to flourish. But industry coalitions mobilized in opposition, arguing that managers could be held hostage to special interests.

An SEC initiative four years ago to open up the process fizzled after touching off a firestorm in corporate America. The latest attempt marks the sixth time since 1976 that regulators have attempted to change the way corporate board members are elected, leading even some of the five SEC commissioners to question whether meaningful change is likely.

"Every time the agency's dealt with it over the last 50 or 60 years, it's been a quagmire," said securities lawyer Amy L. Goodman of Gibson, Dunn & Crutcher.

SEC Chairman Christopher Cox insisted that the commission would act in time for the next proxy season, meaning a final vote would have to come by November or December.

Cox, who strives to achieve unanimity, split the difference yesterday and proposed two opposing responses to the ruling last September by the U.S. Court of Appeals for the 2nd Circuit.

He voted with two Republicans to issue for public comment a plan that would codify the system in place before last year's appeals court ruling, essentially allowing companies to exclude investor proposals to nominate board members from proxy ballots.

Under the current system, shareholders do not have the option of voting "no" to candidates for board seats. If they do not like a candidate, investors' only option is to withhold their vote or to mount an expensive campaign to send materials to every shareholder and persuade corporate managers to include a different slate of nominees. Democratic Commissioner Roel C. Campos labeled the approach "Soviet-style" democracy.

Cox, a former Republican House member, then sided with the SEC's two Democrats to seek input on a plan to give large investors more rights.

This approach explicitly would allow proposals on board members from investors who have held at least 5 percent of a public company's shares for at least one year. "Protecting the property rights of America's shareholders is the only way to ensure that boards of directors remain accountable to the interests of investors," Cox said.

Paul S. Atkins, a Republican on the panel, raised alarms about whether the agency had legal authority to issue the broader plan, which he said could result in the "tyranny of the minority." U.S. Chamber of Commerce officials disseminated a statement reasoning that corporate boards "are already extremely responsive to shareholder interests."