The Securities and Exchange Commission rejected a staff proposal yesterday that would have required members of a company's board of directors to be labelled in public filings according to their relationship to the corporation.
The staff argued that the labels would help stockholders determine whether board members are truly independent.
It proposed that directors be described in proxy statements to shreholders as "management" for company employees, "related non-management" for outsiders with ties to the company and "unrelated non-management" for board members with no material ties to the company.
Commissioner Roberta Karmel, the most vocal of those in opposition, described the "affiliated non-director" label as "perjorative."
The debate over adoption of so-called corporate governance rules took place during an open commission meeting at SEC headquarters.
In opening remarks, chairman Harold Williams noted that some 600 persons and organizations accepted the SEC's request for comment on corporate governance. "The file is the biggest in the Commission's history," he said.
Williams has stressed in speeches the need for independent, or outside, directors on corporate boards. But yesterday he joined the opposition to labels, saying they "oversimplify."
Instead of labels, the commission called for more detailed descriptions in proxy statements of relations between board members and companies.
In April 1977, the staff began its broad re-examination of SEC rules concerning stockholder communications, stockholder participation in electing directors and the general area of corporate governance.
The idea was to provide stockholders with fuller disclosure of the relationship of board members who also may draw income-from the company such as lawyers, suppliers and bankers. The SEC staff reasoned that these board members would be more responsive to the chiefs executive officer - who has power over their business relationship with the company - than to the stockholders they are supposed to represent.
The commission ruled yesterday that a company must disclose dealings with customers and suppliers that among to one percent of the company's revenues.
Relationships of creditors to a company also must be disclosed if loans amounts either to one percent of the total assets, or $5 million, whichever is less.
While voting down use of labels to describe these relationships, the commission did say that if companies choose to use labels - such as "independent" or "outside" - to describe their directors, those directors must meet the definition of "unrelated non-management."
In a related decision, the commission voted to require corporations to disclose the existence of compensation and nominating committees. The companies also must describe the functions actually performed by those two as well as by the company's audit-committee.
The commission also proved a staff recommendation that companies disclose to stockholders and number of meetings held each year by the board and by the audit, compensation and nominating committees.
The SEC expects the rules adopted yesterday to be published by the end of the month. They will apply to fillings of public companies whose fiscal year ends after Dec. 25.