Backtracking on the Road to Corporate Reform

Updated from 6:52 a.m. EDT

The flame of corporate reform is flickering.

New regulations that once seemed nearly certain, such as stock-options expensing and liberalized proxy-access rules, now appear to be in doubt amid vociferous opposition from corporations and executives across the country.

Sparked by the collapse of Enron and WorldCom and by numerous other scandals, the reform movement spurred plenty of new laws and regulations. But some corporate critics now worry that the fire of reform may be snuffed out before it fundamentally changes the relationship between corporations and their shareholders.

"We're in the part of the movie where the empire is striking back," said Nell Minow, founder of watchdog group The Corporate Library. "Certainly the corporate community is coming back very strongly to roll back or prevent reform."

Shareholder advocates point to a number of troubling signs:

The movement to expense stock options is in doubt. With Silicon Valley firms leading a fierce lobbying effort against expensing, a House committee recently passed a measure that would limit expensing stock options to those granted to corporations' five most highly paid executives -- and then only after the government conducts a study on the impact of expensing. The bill, sponsored by Republican Rep. Richard Baker of Louisiana, was passed by the full House on Tuesday by a 312 to 111 vote.

Amid this congressional action, representatives from both the Securities and Exchange Commission and the Financial Accounting Standards Board -- which regulates the accounting industry -- have discussed delaying implementation of any new rule on expensing for at least a year. This development reminds some of the mid-1990s, when FASB abandoned its last effort to force expensing of options after Congress threatened to intervene. The end result of that episode was the current mandate requiring that companies merely include an estimated expense in a footnote in their financial reports.

New proxy access rules appear stalled. The rule, proposed last October by the SEC, would allow shareholders to place their own board candidates on company ballots in certain circumstances. Activist investors such as the California Public Employees Retirement System, or Calpers, initially pushed for a much more liberal rule. But the SEC has been unable to pass even the limited one under consideration.

SEC Chairman William Donaldson was initially a strong proponent of the reform, but has since retreated. Donaldson also has been unable to work out a compromise between the Democratic commissioners who support the rule in its current form and the Republican commissioners who adamantly oppose it.

Public companies have been increasingly successful at calling into question the motives and tactics of activist investors. When Calpers and other pension funds targeted Safeway (SWY) and Chairman Steve Burd earlier this year -- citing the company's recent poor performance -- the company spun the tables, making an issue of the funds' links to union groups that had just concluded a bitter strike against the grocer.

Even other reform-minded investors and some of Calpers' own board of governors have questioned Calpers' decision to vote against any board member who sat on an audit committee that approved of an auditor performing any kind of consulting work. Auditors perform nonauditing work at some 85% of the companies whose shares Calpers owns, the giant pension fund estimated prior to the start of the proxy season. Calpers voted against the vast majority of audit committee members at those companies this year, with seemingly few tangible results.