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.
  • While the technology industry is fiercely fighting stock-options expensing, groups such as the Chamber of Commerce and the Business Roundtable have become increasingly vocal in the reform debate, vehemently opposing the proxy-access rules.

    Many business groups supported the Sarbanes-Oxley Act and other reforms, but some are now raising concerns about the costs and time involved in complying with those rules.
  • "Does the reform movement have the momentum that it had? No," said Lynn Turner, the head of research at proxy adviser Glass Lewis and a former chief accountant of the SEC. "We've probably seen as much of a gain as is going to occur. Now the question becomes how much of that gain sticks."

    Big Business Gets Big Mo

    The change in momentum follows two years of rapid regulatory and governance changes, most notably the landmark Sarbanes-Oxley Act, which created a new federal agency to oversee accounting and increased companies' disclosure requirements. In addition, the stock exchanges enacted new listing standards, increasing the portion of company directors that had to be independent while the SEC passed new rules, which soon will require mutual funds to disclose their proxy votes and corporate insiders to file electronic reports of their stock sales.

    But the movement went beyond new rules and regulations, as criminal charges were filed against accused white-collar criminals such as Martha Stewart, former Tyco ( TYC) chief Dennis Koslowski and members of the Rigas family -- founders of Adelphia Communications. Meanwhile, investors stepped up their scrutiny, pushing through record numbers of shareholder proposals and campaigns to withhold votes from directors.

    As late as this spring, the reform movement seemed to still be making inroads. Michael Eisner resigned his title as chairman of Disney ( DIS) in March after investors withheld 45% of shares in his bid for re-election. In May, Donaldson was still stumping in favor of the proposed proxy-access rule. And many observers felt that a new rule requiring stock-options expensing was all but inevitable.

    But the reform movement clearly has run into strong headwinds.

    Part of the problem has a lot to do with the reformers' own success. Groups such as the Business Roundtable, which is composed of CEOs of large companies, argue that new reforms should be put on hold to give policymakers and businesses time to catch up.

    "We feel there's been dramatic and lasting reforms to our system of corporate governance," said Tita Friedman, a spokeswoman for the Roundtable. "We feel we need to take a step back and let the reforms be absorbed."

    In the meantime, the reform fire may be running out of fuel. After three years of declining returns, the markets rebounded strongly in 2003 while the scandal front seemingly has quieted.

    "It's now been a couple of years since people lost a lot of money in the markets ," said Turner. "Americans' memory tends to be as long as a toothpick."

    There's also a general feeling in Washington that most of the major reforms have been done, said Chuck Gabriel, senior political analyst at Prudential Securities. Policymakers and regulators already have targeted auditors, board members and the mutual fund industry, he noted.

    The election season is also helping stymie reform efforts. What little focus policymakers are giving to issues beyond the election these days is going to current hot-button issues such as the war in Iraq or the economy.

    "There's not the same kind of righteous indignation about corporate behavior and Wall Street papering over it," Gabriel said.

    The problem, as corporate critics see it, is that the reform battle isn't over. Shareholders still have little control over CEOs and boards. And executive pay -- an important indicator in the minds of many corporate critics -- continues to spiral upward.

    To be sure, the reform movement hasn't died out completely. On July 14, the SEC approved a plan that would require hedge funds to register with the agency and give the SEC the power to periodically review the books of particular funds. Last month, the SEC adopted a rule that will require mutual funds to be headed by independent chairmen and an increasing number of independent directors.

    Furthermore, some reform advocates vow to keep holding corporate directors' and executives' feet to the fire.

    "What's indisputable is that business is pushing back hard," said Rich Ferlauto, the director of pension and benefit policy for the American Federation of State, County and Municipal Employees union. But he added, "We haven't stepped back from our agenda at all. There's no going back."

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