SEC Votes to Limit Shareholder Rights
Thursday, November 29, 2007
Companies will be able to scuttle investor attempts to nominate board members under a plan adopted by a bitterly divided Securities and Exchange Commission yesterday.
The move drew an outcry from key lawmakers, unions and major retirement funds, which criticized SEC Chairman Christopher Cox, a Republican, for pushing the plan at a time when the agency is short one Democrat and another is on her way out the door.
The 3 to 1 vote, in which the SEC's lone remaining Democrat dissented, marked the most controversial action in the two-year tenure of the agency's chairman. It was the latest development in a debate over investor rights that has been boiling for decades, pitting chief executives against pension funds and union groups.
At issue was how securities regulators would respond to a court decision last year that appeared to give investors more leeway to nominate board candidates. The SEC in July proposed two opposing rules: One would have offered large, long-term investor groups more power to select board nominees by requiring companies to include those nominees in their proxy ballots.
The other, approved yesterday, gives companies the authority to reject summarily any investor proposal that suggests candidates for corporate boards. Companies would not be required to consider investors' board nomination proposals or even include them on proxy statements for dissemination to other shareholders.
Cox had supported the broader plan making it easier for shareholders to nominate members when it was announced, but the measure lacked the three votes required for passage after Democrat Roel Campos left the SEC in the summer for a law partnership. That left only the more limited plan, which Cox and two other Republicans approved yesterday.
Cox said yesterday that his hand was forced by the need to give companies guidance in time for the looming 2008 proxy season; he portrayed the plan approved by the SEC as an important source of clarity for companies. But Cox also vowed to revisit the issue next year, when new Democrats could be on board and provide the necessary votes to advance a more sweeping proposal.
Annette Nazareth, a Democratic commissioner who has said she hopes to leave by the end of this year, said the majority ignored more than 34,000 letters investors sent to the SEC pleading for more power to change boards of directors, which have been criticized for their sometimes clubby atmosphere and their reluctance to challenge chief executives. Instead, she said, the agency worked "explicitly and unreservedly to deny shareholder rights."
"This is a sad day for shareowners," said Ann Yerger, executive director of the Council of Institutional Investors, which counts more than 100 of the country's largest pension plans and retirement funds as its members.
Rep. Barney Frank, a Massachusetts Democrat who has supported Cox in the past, expressed disappointment in the vote and said it "will leave shareholders with inadequate recourse to influence insular boards that are unresponsive to shareholder concerns."
Union officials said the issue was not closed. Yesterday they pressed Bear Stearns and J.P. Morgan Chase to open access to their corporate ballots as part of a wide-scale campaign challenging the agency's plan. The unions said they are prepared to sue if the financial services companies, which are grappling with losses from the subprime-mortgage market, refuse to grant access to shareholders.
Richard Ferlauto, director of public pension policy at the American Federation of State, County and Municipal Employees, said the SEC plan was "both ill considered and substantially flawed. It will not stand up to a legal challenge."
But business groups, which have repeatedly beaten back other attempts by investors to nominate board members over the past 50 years, praised Cox.
John Castellani, president of the Business Roundtable, said the vote was "the right decision for the right reason as it provides clarity and certainty for shareholders and companies."