Securities and Exchange Commission Chairman William H. Donaldson is laboring to broker a compromise on a controversial plan to revise the way corporate board members are elected, under heavy pressure from both business groups and shareholder rights advocates.
For the past several weeks, agency staffers have been meeting one on one with SEC commissioners, seeking to reach agreement on the complex plan. The last time the SEC proposed changes to board elections, in 1977, they were scuttled by lobbyists. The agency has not publicly set a deadline for action, and commissioners have not yet received a written summary of possible changes to the plan. But SEC officials soon will come up against practical considerations. To have a plan in place for the 2005 proxy season, the agency would have to act quickly, perhaps even by the end of this summer, one official said.
Law professors, former agency officials, and corporate governance experts said the director proposal could be the most significant step the SEC has taken in years on the governance front because it could go far toward reforming the clubby relationship between corporate boards and chief executives.
"It will be the issue that defines Donaldson's legacy," said former SEC chief accountant Lynn E. Turner, a strong supporter of the reform.
"There is no question it is vastly more significant than anything that came out of Sarbanes-Oxley," the landmark 2002 corporate reform act, said Nell Minow, editor of the Corporate Library, a firm that researches and rates companies on their governance practices. "This is for all the marbles."
The proposal, issued last year, has drawn 16,000 comment letters, the threat of a lawsuit from the U.S. Chamber of Commerce, and strenuous opposition from the Business Roundtable, whose chairman, Henry A. McKinnell, has raised at least $200,000 for the reelection of President Bush. Bush nominated Donaldson for the chairman's job.
Tita Freeman, communications director for the Business Roundtable, yesterday said the original proposal would allow investors with special interests to "hijack the director election process." David Hirschmann, a senior vice president at the U.S. Chamber of Commerce, called the plan "unfixable."
Longtime observers of the SEC say Donaldson's effort has been complicated by the fact that he inherited a somewhat divided commission, on which Democrats Harvey J. Goldschmid and Roel C. Campos regularly vote together and Republicans Paul S. Atkins and Cynthia A. Glassman generally express more skepticism about regulation.
Donaldson declined to comment yesterday through spokeswoman Laura Cox. But four insiders at the SEC said pressure has been building on him to bring the issue to a vote. Other officials within the administration, including Treasury Secretary John W. Snow, have contacted Donaldson to discuss the original proposal and its potential impact on businesses, according to two SEC sources, who would speak only on condition of anonymity. A Treasury spokesman was traveling yesterday and did not return calls.
The original plan provided two ways for dissident shareholders to offer their own candidates for corporate boards. At least 1 percent of shareholders could put a proposal on the proxy ballot seeking to place a board nominee on the following year's ballot. If a majority of shareholders approved the choice, that candidate would have a place on the next year's ballot. Or, if 35 percent of shareholders withheld their votes from a candidate or group of candidates, investors would win the right to offer alternative choices on the next year's ballot.
At least three commissioners have said recently they would agree to cut the language that would have allowed as few as 1 percent of investors to put forward a nominee. Instead, the commissioners are evaluating an idea that would speed up the process of electing directors at some troubled companies under specific circumstances.
Of more concern to shareholders' rights groups is a "cure" proposal being floated that would allow a board of directors' nominating committee to select a new board candidate if investors withheld votes from a sitting director. That idea, which is backed strongly by some business groups, would eviscerate the reform by putting control in the hands of a small group of corporate directors rather than the dissatisfied shareholders, opponents argue.
Other business groups are concerned the "cure" would, by the way it counts the votes to trigger replacement of a candidate, give too much leverage to unhappy shareholders, particularly institutional investors.
Donaldson, meanwhile, continues to get advice on how to navigate through the political waters, sometimes from sources who have traveled a familiar path. Former SEC chairman Arthur Levitt Jr. recently wrote an op-ed article in the New York Times stressing the importance of the director proposal.
And former SEC Chairman David S. Ruder, in remarks at a historical society meeting in Washington last week, had this counsel: "Three votes are enough. Three to two is a perfectly acceptable way to adopt rules, and I sure hope that he follows that advice in the future."