SEC gives shareholders long-sought boost

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By Zachary A. Goldfarb
Washington Post Staff Writer
Thursday, August 26, 2010

For years, the nation's largest companies - from FedEx and Macy's to AT&T and IBM - have opposed proposed federal rules that would make it easier for shareholders to oust directors on corporate boards. These industry giants have said that the proposed rules would be costly and hurt average investors saving for retirement or their children's college education.

On Wednesday, the companies lost the argument. The Securities and Exchange Commission voted 3 to 2 to approve new rules giving shareholders new powers to nominate directors to corporate boards. Supporters say the rules will give shareholders the ability to hold boards accountable for overseeing executive pay and other decisions that companies make.

"Shareholders should have a means of nominating candidates to the boards of the companies that they own," SEC Chairman Mary Schapiro said. "These rules reflect compromise and weighing competing interests."

Critics of the proposal say average investors, who don't participate in large numbers in the affairs of companies whose stock they own, will not benefit from the rule. Rather, they say, large shareholders with specific interests, such as labor unions and pension funds, will seek to use these new powers to press their agendas.

"This special-interest-driven rule is a giant step backwards for average investors," said David Hirschmann, a top official with the U.S. Chamber of Commerce. Giving "pension funds and others greater leverage to try to ram through their agenda makes no sense. Instead of giving some investors front-of-the-line passes, the SEC should be focused on advancing the interests of all investors, including retail investors."

Supporters point to the financial crisis as evidence that shareholders need new powers, saying boards failed to conduct rigorous oversight of pay practices and business decisions at banks and other financial firms.

"One of the lessons of this current economic downturn is to be mindful that governance is a significant risk factor and that greater accountability, which this ruling affords, will go a long way toward mitigating that risk," said Jack Ehnes, chief executive of the pension fund for California's teachers.

The rule would apply to all public companies. Small public companies would be exempted for three years.

Currently, shareholders can only nominate directors at annual meetings. But that is often too late, because months earlier the company sends ballots of its self-chosen nominees to investors who won't be able to attend the annual meeting. These statements help solidify a company's choices, making it virtually impossible for a candidate first nominated at an annual meeting to receive enough votes to win a spot on the board.

The SEC's new rule will make it easier for investors - or groups of investors - who collectively own 3 percent of a firm's shares for three years to nominate directors.

The SEC's vote Wednesday will allow shareholders to nominate directors on the proxy ballots sent to investors. A shareholder or coalition of shareholders will be able to nominate one board member if the board has a total of seven or fewer members, or 25 percent of the total board if it is larger.

There is disagreement about whether the rules will have the desired effect. For that reason, among others, Republican commissioner Kathleen L. Casey voted against the rule. She charged that the SEC's move reflected a political desire to appease special interests. She put it on the same level with recent initiatives restricting the short sales of stock and requiring companies to disclose how their business is affected by climate change.


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