NYSE Governance Rules Have Activists Salivating

Shareholder activists, enjoying a kind of renaissance in the wake of Enron and other recent fiascos, say corporate governance regulations being proposed by the New York Stock Exchange are a light at the end of the tunnel.

"The rules will give shareholders weapons that they didn't have before," said Patrick McGurn, vice president of Institutional Shareholder Services, a proxy advisory firm. "They will level the playing field."

According to the proposal -- which was outlined in press reports over the weekend -- the New York Stock Exchange is seeking to require listed companies' boards to be composed mostly of independent directors. Currently, only three members of a board, no matter its size, need to be independent.

The changes come in the wake of energy trader Enron's bankruptcy in late 2001 and criticism of its board for failing to raise questions about the company's accounting. About a quarter of the Big Board's approximately 3,000 members do not meet the new independence requirement.

Since January, shareholder activism has surged, as confidence in businesses has plunged. So far this year, 60 shareholder proposals have received a vote, according to McGurn, compared with 75 in all of 2001. Proxy fight activity and votes against management proposals are also trending above normal this year.

"A lot of fights have been about board of director independence," said McGurn. "The new proposal allows shareholders to move on to more progressive issues."

In fact, many experts think the new rules may actually give shareholders less reason to get involved. "You may see more negotiations behind the scenes and less fighting at meetings," said McGurn.

Nel Minnow, editor of the Corporate Library, a Web site devoted to corporate governance issues, is confident that shareholder activism will become less necessary with the new guidelines. "These rules accomplish, in one fell swoop, what shareholders have been striving for," she said.

Peter Clapman, senior vice president of TIAA-CREF, the largest pension system in the world, says the guidelines would "remove barriers to effective communications" and "harmonize relationships." But Clapman worries the new rules -- which are expected to be decided on at a meeting of New York Stock Exchange directors on Aug. 1 -- might not be adopted as proposed. "Until they are implemented, there is concern about pressure from segments of the business community," he said.

As part of the proposals, the NYSE will redefine what it means to be independent. A company will have to prove in regulatory filings that its board members do not have material relationships with it.

Non-management directors would have to meet regularly without management present. And a shareholder owning 20% or more of the company's shares may not vote on audit committee matters.

The guidelines also stipulate that shareholders vote on all stock option plans, a hot-button issue for shareholder activists. Currently, only options that include officers or directors get a shareholder vote.

"This will force companies using shadow plans into a deeper discussion of them," said McGurn.

But on this point, Clapman worries about potential opposition from business interests. New corporate rules by the Nasdaq -- which are awaiting Securities and Exchange Commission approval -- require only that stock-option plans including an officer or director be voted on by shareholders.

The Business Roundtable, an association of CEOs, has already come out against the NYSE's proposal for shareholder approval for all plans, saying it could end up reducing the number of options and stock granted to rank-and-file employees because of the additional costs of shareholder approval.

Jeffrey Gordon, a law professor at Columbia University, agrees that firms might not want to take a chance on shareholder disapproval, thus reversing a trend of giving options to an entire employee base.

"It could change the compensation mix for employees," said Gordon. "It's not unreasonable to think that questions might arise about the extent of shareholder involvement in management decisions."