SEC May Give Board Rebels Some Help

Change is coming to the clubby American boardroom whether the old boys like it or not.

On Wednesday, the Securities and Exchange Commission will propose sweeping new rules designed to make companies more responsive to their real owners -- the shareholders. Although the proposals have yet to be released, early drafts suggested the most controversial rules would make it cheaper and easier to allow dissident shareholders to nominate a slate of directors.

Shareholders, daunted by prohibitive costs and a system stacked against them, rarely use proxy fights to challenge entrenched management. El Paso (EP) and Luby's (LUB) were on a very short list of companies that have faced recent proxy battles, both of which failed to unseat directors.

In Wall Street's biggest corporate governance showdown this year, dissident holder Selim Zilkha took aim at directors of El Paso, accusing them of selling off core businesses and wracking up a huge debt in an ill-advised foray into the riskiest segments of the energy business. Zilkha's dissident slate of directors lost, even though they ran an organized and well-financed campaign supported by influential names such as the AFL-CIO and proxy adviser Institutional Shareholder Services.

In a far more quixotic effort, a number of Luby's investors upset with the cafeteria chain's poor performance ran a dissident slate of four directors in the January 2001 election. The dissidents spent $75,000 and won only 24% of the vote.

Rock the Boat?

Governance critics favor the SEC's proposal but feel it isn't far-reaching enough. They say it sets the bar for change too high, and has the potential to restrict the trading rights of dissidents. At the same time, a nationwide group of CEOs says it goes too far.

At issue is a rule that would allow groups of shareholders whose combined holdings reach a certain threshold -- likely to be in the 3%-to-5% range -- to place a slate of director candidates on the ballot, but only after a "triggering" event takes place. The trigger might take effect, for example, if a board rejects a proposal approved by a high percentage of shareholders, or a high number of shareholders withhold their votes during a board election.