By Jia Lynn Yang
Washington Post Staff Writer
Friday, May 14, 2010; A11
Businesses far from Wall Street have intensified their efforts to kill a largely overshadowed provision of the Senate's financial regulation bill giving shareholders more ammunition to shake up corporate boards.
A rush of chief executives from a wide swath of industries has been coming through Washington over the past three weeks, talking to lawmakers about a long-debated issue called "proxy access," which would make it easier for shareholders at all publicly traded companies -- not just banks -- to nominate board directors. Opponents say the rule has nothing to do with overhauling Wall Street and doesn't belong in the legislation.
"This is our highest priority," said John Castellani, president of the Business Roundtable, which represents 170 chief executives. "Literally all of our members have called about this."
Last week alone, Castellani said, 40 chief executives were in town visiting Capitol Hill about proxy access. Concern cuts across industry lines. Steve Odland of Office Depot, Ivan Seidenberg of Verizon and Jim McNerney of Boeing have all been in Washington arguing against the provision.
So has Ursula Burns of Xerox, who is the vice chairman of President Obama's Export Council and a longtime supporter of his. Obama supports proxy access in the overhaul of financial regulation.
Advocates for shareholders' rights, including unions and institutional investors, say the crisis on Wall Street had everything to do with corporate boards failing to do their jobs.
"This hinges on senators recognizing the fact that boards in too many companies like Citigroup or AIG really failed in their responsibilities here," said Daniel Pedrotty, director of the AFL-CIO Office of Investment.
With proxy access, shareholders would be able to send a strong message to management if they weren't happy with a company's strategy, for instance, in managing risk or charting growth. On the other side, public companies fear that proxy access will mainly invite activist investors and hedge funds to infiltrate boards and topple existing management -- whether out of displeasure with how a company is run or to pave the way for a hostile takeover.
The end result, corporate executives warn, is that board directors will feel constant pressure to juice up their company's stock price and put short-term considerations ahead of the firm's long-term health.
"This is absolutely a critical issue for the business community," said Alexander Cutler, chief executive of Eaton, a $15 billion power management company based in Cleveland. "You can term it the holy grail of corporate governance."
The debate over proxy access stretches back nearly a decade. Under current law, if shareholders want to nominate their own board directors, they must pay for publicizing candidates and mailing ballots, which can cost millions of dollars. Critics say this discourages shareholders from making the effort. Proxy access would force companies to foot the bill for outside nominees.
The Securities and Exchange Commission is already considering a proxy access rule, but it's unclear whether the agency has the legal authority to implement it. The bill's provision, whose chief proponent has been Sen. Charles E. Schumer (D-N.Y.), would bolster and clarify the SEC's power.
Sens. Thomas R. Carper (D-Del.) and Bob Corker (R-Tenn.) have introduced amendments that would cut proxy access from the bill, but they may never come to a vote, given that there are more than 250 other proposed amendments and many will not be considered. Castellani said his group has gotten a sympathetic hearing from Democrats including Sens. Mark Warner (Va.), Evan Bayh (Ind.) and Ted Kaufman (Del.).
Corporate law has traditionally been determined on the state level. Allowing the SEC to weigh in on proxy access would increase the federal government's role in determining how companies should be run. The state of Delaware and its senators, in particular, are worried because ceding authority to the SEC could undercut the state's advantage as a business-friendly place for companies to incorporate, thus costing millions of dollars in state income. Delaware is the legal home of more than 50 percent of all U.S. publicly traded companies.
Some skeptics are concerned that the proxy access provision, which would affect roughly 12,000 companies, isn't getting thorough consideration since it's buried in a bill that's focused mainly on Wall Street.
"It's like sticking a hammer inside a club sandwich," said Lynn A. Stout, a professor of corporate and securities law at UCLA. "The two don't have much to do with each other."
Stout, who supports overhauling financial regulation, says there is no evidence that more shareholder rights would have altered the course of the financial crisis -- or that more rights will lead to better returns for investors.
"We talk about shareholder democracy, but what we really mean is activist hedge funds and state-pension-fund democracy," she said. "There's really no evidence this is going to benefit long-term diversified investors, which means the rest of us."
Supporters of proxy access counter that institutional investors are just as interested in the long term as everyday, 401(k) investors. And any board nominee would still have to be approved by a majority of shareholders. Jeff Mahoney, general counsel at the Council of Institutional Investors, said the fears of these businesses are overblown.
"Just because you put someone on the proxy card doesn't mean they'll be elected," he said. "At the end of the day, no one is going to get on the board unless most of the owners of that company want that."