Investors Ramp Up Fight for Ballot Choice

Editor's note: This is the third story in an occasional series exploring the rise in shareholder activism and its impact on U.S. corporations amid the economic downturn. The first explored reasons behind the trend. The second detailed efforts by investors to rein in soaring executive compensation.

Like baseball, voting for corporate board members is a time-honored springtime tradition.

But that tradition is increasingly under fire from angry shareholders who say the game is rigged.

Because the ballots provided to investors list only one slate of candidates, handpicked by company management, critics say the system is undemocratic and prevents shareholders from appointing representatives who will truly look out for their interests.

Shareholder advocates have been clamoring for years to get equal access to the ballot -- known as a proxy card -- to field alternative choices for company boards. Now, as investors contemplate staggering writedowns at the world's largest financial firms, and as America prepares for a change in the political landscape, some shareholder advocates believe the chance to win proxy access is better than ever.

And while the rich sendoffs of subprime poster-boys Angelo Mozilo, Countrywide Financial'sCFC CEO, and Stanley O'Neal, the ex-Merrill LynchMER chief, have made "say on pay" the hot-button issue at this year's shareholder meetings, it's possible that this proxy season could turn out to be one of the last in which board elections are conducted without opposing candidates.

"This is one of those issues, if it's ever going to get acted on, it would be in this current market environment, with a change in party in the [Securities and Exchange] Commission and in the White House," says Patrick McGurn, special counsel at corporate governance firm RiskMetrics.

'Proxy Battles'

Among the groups that have pushed proxy access to the top of the agenda in recent years are the California Public Employees' Retirement System, or CalPERS, the nation's largest pension plan with $250 billion in assets under management, and the Council of Institutional Investors, an association of public, union and corporate pension funds representing $3 trillion in assets.

According to the council, shareholders' right to vote is "inviolate," and shareholders owning 5% or more of a company's stock should be provided equal space in company-issued proxy materials to field their own director nominees.

The SEC sees things differently, and recently delivered a stinging blow to the notion of shareholder proxy access.

The commission adopted a landmark rule in November explicitly barring shareholders from placing director nominees on a company's proxy card. The rule negated a 2006 federal appeals court decision that took the opposite position.

The SEC rule means that shareholders seeking to nominate alternative nominees for a company's board of directors are limited to waging so-called proxy battles, in which they distribute separate ballots and voting material to fellow shareholders -- a process that some say can cost millions of dollars for large-cap companies.

The SEC has promised to revisit the issue of direct proxy access in 2008, given that its five-member panel of commissioners voted on the rule when one of its two Democratic seats was vacant.

What's clear is that the SEC rule has not made the issue go away.

Rep. Barney Frank (D., Mass.), who heads the House Committee on Financial Services, decried the SEC rule as "a step backwards for shareholders," leaving them with inadequate resources to influence insular boards.

Prior to the vote, Frank reportedly threatened that Congress might suspend any SEC rule on proxy access adopted without a full panel of commissioners. A spokesperson for Frank would not comment on any forthcoming actions relating to proxy access.

Other legislators that have spoken out in favor of proxy access include Sen. Jack Reed (D., R.I.), Sen. Robert Menendez (D., N.J.) and Sen. Chris Dodd (D., Conn.).

The issue is getting attention on Capitol Hill, notes Michael Ryan, director of capital markets competitiveness at the U.S. Chamber of Commerce, one of the leading groups that oppose proxy access. For that reason, despite the SEC rule blocking proxy access, he says the Chamber of Commerce remains concerned about "where this might go."