Investors large and small have weighed in on two Securities and Exchange Commission proposals dealing with shareholders' rights to nominate directors to company boards. With the comment period ended last Tuesday, many now say they fear their rights may be curtailed.
"Both proposals are deeply flawed," wrote Edward J. McElroy, president of the American Federation of Teachers, in a Sept. 27 letter to the Commission. The statement is a pointed example of the mostly negative sentiment expressed in thousands of comments to the SEC.
At issue is proxy access, or, in the words of Gerald McEntee, president of the American Federation of State, County & Municipal Employees (AFSCME), "the Holy Grail of corporate governance reform."
Specifically, powerful shareholders, including unions, socially responsible investors and state pension plans want the ability to place director candidates of their choice on a company's proxy ballot. Until now, outside nominations required shareholders to develop and distribute their own proxy materials to mount such a challenge. The SEC came out with the proposals after a federal appeals court said the Commission cannot continue to allow corporations to exclude shareholders' proposals on proxies and must review the issue.
Even the Investment Company Institute endorses shareholders' right to propose directors, although the ICI has asked the SEC to consider higher thresholds in order to preclude opportunistic investors.
The SEC in July put forward two competing proposals. One would allow companies to exclude shareholder proxy-access proposals. A second would pave the way for proposals, but only if they have the backing of shareholders who own at least 5% of a company's stock for a year or longer. Critics say that either proposal would weaken the rights of shareholders. Many shareholder proponents say the 5% threshold is too high. The State of Connecticut argued, for example that 5% of Exxon Mobil would be $25 billion, the size of its entire pension plan.
Experts say the SEC is under pressure from corporations on one side and investors on the other, as it tries to solve the riddle of how much power to allow activist investors. With proxy season approaching and with corporations and some powerful investors at a standoff, the Commission is under the gun to provide clear rules and guidance for both sides.
"The Commission must resolve this by November, maybe early December," said Charles Nathan, a partner with Latham & Watkins in New York. "That will be crunch time for shareholder proposals."
SEC Chairman Christopher Cox is known for seeking out common ground along the Commission's political fault line, and he could well try to hammer out a compromise position bridging the two proposals. Support for the two plans in July was split among the Democratic and Republican Commissioners, with the chairman voting in the affirmative for each.
"He will try to triangulate something that sets out clear rules of the road," Nathan said. "Otherwise, it will be a free-for-all."
Robert Messineo, a partner with Weil, Gotshal & Manges in New York, agreed that despite the complexities confronting the Commission, it's likely to hammer out the best solution it can without tabling the matter.
"It would be very unusual for the commission to leave the uncertainty created by the court of appeals' decision in place for another proxy season," he said. "I think that's a big factor that leads to some sort of decision."
Indeed, Cox has pledged to act before the 2008 corporate annual meeting season begins. But further complicating matters is the fact that the SEC's senior Democrat, Roel Campos, stepped aside last month. Then news leaked last weak that the lone Democrat remaining, Annette Nazareth, plans to leave as well, although the timeframe is unknown.
That will leave the Commission two people short and skew its political balance to three Republicans: Cox, Paul Atkins and Kathleen Casey.
The math has not been lost on investors, many of whom are urging the SEC to delay the adoption of either proposal until it replaces Campos.
McElroy, president of the American Federation of Teachers, said that "due to the departure of Commissioner Roel Campos and other proposed changes to the Commission, the SEC should defer any actions until a full complement of Commissioners is able to give any proposed changes their full attention."
For 17 years, the SEC has held that corporations can bar from their proxies proposals that would allow shareholders to more easily get their nominees on proxy ballots-right beside management's slate of nominees.
That status quo suffered a serious blow a year ago when the New York Court of Appeals ruled that American International Group could not block a proposal by AFSCME from its proxy statement. That proposal would amend the insurer's corporate bylaws so that director candidates could more easily be nominated.
The shockwaves rumbled down to Washington, where the SEC launched its two proxy access proposals intended to clarify and strengthen the rules.
The SEC comments reveal that some shareholder groups would like to see the court ruling be the last word on proxy access.
The Second Circuit ruling's "clarification has created a vital opportunity for investors to posit reforms that would finally give them a meaningful voice in the election of directors," wrote Bob Lennox, a trustee of The Western Conference of Teamsters Pension Trust Fund. "We believe it would be shortsighted for the SEC to adopt new rules on this issue in haste before investors are able to test and evaluate this newly available proxy access option."
Among the proponents of the SEC's efforts is St. Louis-based Peabody Energy, a company with $5.2 billion in annual revenues. The company favors the proposal that would allow firms to exclude shareholder proposals relating to board membership, wrote Chief Legal Officer Alexander Schoch. Schoch's letter commends the SEC's effort to "eliminate the uncertainty and confusion" arising from the AFSCME/AIG decision.
To help support his argument, he cites the development of so-called "e-proxy" materials. The system "will eliminate the concern that proxy contests are prohibitively expensive due to the costs of printing and mailing competing proxy materials."
The SEC has also proposed allowing online discussions to replace nonbinding shareholder resolutions. Proponents of such resolutions, however, have argued that they are effective in prodding corporations on social issues and corporate governance.
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