SEC Moves to Make Companies More Accountable to Shareholders

By Zachary A. Goldfarb
Washington Post Staff Writer
Thursday, July 2, 2009

The Securities and Exchange Commission yesterday announced steps to give shareholders new powers to shape corporate boards as well as more information about how companies pick their directors and pay their management.

The initiatives are among the policies SEC Chairman Mary Schapiro is advocating to try to make companies more accountable to shareholders, largely by giving them greater say in proxy voting contests.

"With over 800 billion shares being voted annually at over 7,000 company meetings, it is imperative that our proxy voting process work -- starting with the quality of disclosure and continuing through to the integrity of the vote results," Schapiro said.

The SEC yesterday approved a proposal that takes power away from stock brokers in deciding who sits on corporate boards.

In the past, representatives of retail brokers could vote the shares of stockholders at annual meetings. They could only do this when the stockholders themselves didn't vote.

Retail brokers tend to vote for the board candidates that the company supports. That makes it harder for activist investors, such as pension funds or labor unions, to shape the board membership.

The measure approved yesterday, which takes effect next year, will no longer allow brokers to vote on behalf of shareholders without their input.

The two Republican SEC commissioners, Kathleen L. Casey and Troy Paredes, opposed the proposal.

"The [current] rule in fact enfranchises retail shareholders by providing a means through which their voice can be expressed.," Paredes said. "Past experience indicates that, by a wide margin, retail shareholders tend to side with management when voting."

Investor groups, however, contend the new measure will force boards to be more responsive to the needs of shareholders.

The process until now has been "akin to stuffing the ballot box for management as broker votes almost always are cast in favor of management's candidates for board seats," said Ann Yerger, executive director of the Council of Institutional Investors.

The SEC also proposed new rules requiring board members to tell investors more about their experience and mandating more disclosures about executive compensation.

Under one proposed change, companies would be required to analyze for investors how their compensation policies might lead to risk-taking. Many analysts suspect that compensation practices at the largest financial firms rewarded top executives for booking short-term profits with investments that turned out to be toxic over the long-term.

Another proposal would require companies to describe the qualifications of directors and top executives, as well as those of board nominees, such as members of compensation or audit committees.

The proposals, which still must be approved by the SEC, seek to stop the practice of treating a seat on a corporate board as a reward, which could lead to board members not being aggressive about policing the practices of management.

The proposed changes would also require companies to disclose more about their use of compensation consultants and bolster reporting of stock and option awards. Companies would also have to post results of annual board meeting votes more quickly.

Paredes, who supported the changes, still warned about unintended consequences.

"As regulatory reforms are proposed to address excessive risk taking, it is important not to overlook that just as a company can assume too much risk, a company also can be overly cautious," he said.

A third proposal formalizes a requirement that companies receiving financial assistance from the government allow a shareholder vote on executive compensation.

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