New Efforts Push Investors to Take a Stand

WASHINGTON ( TheStreet) -- Companies are meant to be small-scale democracies. Chief executives may be perceived as kingly, but boards and shareholders are supposed to be the ultimate rulers.

As government regulation decreased in the 1980s, this system of checks and balances was touted as being a better way to ensure responsible profitability. The conflicts of interest, excessive compensation and Ponzi-like securitization schemes that took root proved that approach to be naive.

"We were taking too much risk," Ethics Resource Center Chairman Michael Oxley (co-author of the Sarbanes-Oxley law) said at the group's conference in January. "Nobody cared as long as the cash register kept ringing, because nobody shoots the bartender when the drinks are on the house."

In pursuing short-term profits over long-term prosperity, many companies were gambling with house money -- as in your house and your money. Government bailouts may have saved some of the endangered "too big to fail" institutions on Wall Street, even propelling some to record earnings, but on Main Street the fallout was toxic.

Household assets, after peaking at $81 trillion in the summer of 2007, dropped by nearly $15 trillion by the end of 2008. Unemployment rose to 10.2%, a 26-year high. Americans' retirement plans lost as much as $2 trillion and, according to Hewitt Associates ( HEW), the average plan shrank by $10,000.

As most American's continue to be nickel and dimed, CEO pay at the nation's 500 largest firms still averages nearly $11 million a year. The Institute for Policy Studies says the average CEO earned about 319 times more than the average worker in 2008.

The spike in compensation may stem from an effort to curb it. A 1992 move by the Securities and Exchange Commission required detailed disclosures of executive pay. Shedding light on these practices didn't shame companies into backtracking. Instead, armed with knowledge of what their peers were pulling down, CEOs demanded more.

In theory, shareholders should keep executives and their often hand-picked directors in line. But even when they have the power to effect change, they usually don't. Less than 20% of individual shareholders voted in annual elections last year, according to Broadridge Financial Solutions ( BR), which builds the infrastructure underpinning proxy services for over 90% of public companies and mutual funds in North America.

Taking a cue from political campaigns, the SEC is undertaking a voter participation drive for shareholders. These efforts aim to educate the public about proxy voting and encourage increased participation in corporate elections.

Among steps it announced last month were revisions to "e-proxy rules" that have been in effect since 2007. Those rules allow a notice to be sent to shareholders indicating that proxy materials are online and available upon request, rather than requiring a full package of materials containing a proxy card, annual report and proxy statement to be mailed.

The experiment may have saved postage, as much as $6 per shareholder, but it took a toll on voter participation. A Broadridge survey found that the 1,363 issuers who used e-proxies saved upwards of $239 million, but saw voter participation fall to about 5%.

The New York Stock Exchange has changed how its companies conduct proxy voting. It has been a longstanding practice that brokers, in the absence of direct contact from their clients, could weigh in on governance matters as though they actually owned the shares. As of Jan. 1, brokers can no longer do so for significant votes or non-routine matters, such as shareholder proposals and the election of directors.

Technology may make also participation easier for shareholders.

Broadridge Financial Solution's, launched in 1998, streamlines the downloading of proxy materials. With a splash page that reads "30% of shares are held by retail investors, but most have no say in the boardroom," the site hopes to be a portal for proxy materials and online voting.

Another site,, is designed to "help shareholders vote their shares by publicizing the intended votes of institutional investors." It places a particular emphasis on helping mutual fund investors understand the voting records of leading funds, "making it possible for them to purchase funds that represent their interests and pressure those that don't."

The Restoring American Financial Stability Act, announced by Sen. Christopher Dodd, D-Conn., and the Senate Banking Committee he chairs last week, includes several new corporate governance mandates.

It seeks to give shareholders a non-binding vote on executive pay and golden parachutes. Standards for listing on an exchange would require that compensation committees include only independent directors and have authority to hire outside consultants. Public companies would be required to set policies for taking back executive compensation if it was based on inaccurate financial statements or deceptive accounting. Companies would also have to provide charts that compare their executive compensation with stock performance over a five-year period.

Another provision would mandate giving shareholders proxy access to nominate directors.

Maureen Thompson, acting executive director of, a nonprofit organization formed to advocate for financial market reforms, praised the bill's sponsors for "recognizing that, if given the tools, investors can play a critical role in holding management and boards accountable and help regulators restore and maintain the integrity of our capital markets and the accountability of its participants."

Her group is also promoting that, in uncontested elections, directors should be elected by a majority of votes cast. At most U.S. public companies, directors in uncontested elections are elected by a plurality of votes cast. Shareholders facing a slate of board candidates nominated by management can only "withhold" their votes to express opposition to a board candidate for an uncontested seat. An uncontested election occurs when the number of director candidates equals the number of available board seats. "Plurality voting in uncontested situations results in 'rubber stamp' elections, while majority voting in uncontested elections ensures that shareowners' votes count and makes directors more accountable," a statement by ShareOwners reads.

The group underscores the importance of giving shareowners the right to place director nominees on the company's proxy. For shareowners to run their own candidates, they need to launch a full campaign, printing and mailing their own proxy cards to shareowners while undertaking a proxy solicitation campaign.

"Even when board members are underperforming, most investors decline to wage such a fight," the group says. "Providing shareholders with access to the proxy and the ability to nominate their own directors will make boards more responsive to shareowners, more thoughtful about whom they nominate to serve as directors and more vigilant in their oversight of companies."

-- Reported by Joe Mont in Boston.

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