Updated from 11:57 a.m. EDT
Securities and Exchange Commission
on Wednesday proposed a weaker-than-expected package of reforms aimed at giving dissident shareholders a better chance of being elected to corporate boards.
But under pressure from business interests, the commission proposal carefully limits the number of shareholder-nominated candidates who can run each year, ensuring that dissidents cannot realistically hope to gain control of a board. Moreover, the commission suggested that only very large shareholder groups have the right to nominate candidates.
Some shareholder advocates called the proposal a "step in the right direction," while others called it "a snooze."
Under current rules, companies rarely put independent candidates on the ballot; shareholders attempting to run slates have to spend thousands of dollars to print and mail their own materials. "They rarely win," said SEC Chairman William Donaldson, who like other commissioners made reference to shareholder anger over unresponsive and ineffective boards.
Under the proposal, investors would be able to get on the ballot if one of the following "triggers" occurs.
A group representing at least 1% of a company's investors could put a proposal on the proxy ballot requesting that a shareholder nominee or nominees be added to the ballot the following year. The proposal would then need the approval of more than 50% of shareholders to win. Significantly, this step nominates no one. It merely gives shareholders the right to run a slate.
Or, if 35% of the votes cast by shareholders are withheld from a management-nominated candidate or slate of candidates for the board, investors would be allowed to run a candidate. (Commissioner Cynthia A. Glassman proposed that the threshold be 50% and said she would push for that change.)If either trigger occurs, shareholder groups that have controlled least 5% of the company for two years may then make an actual nomination. Although the triggers were designed to be restrictive, the SEC proposal does give dissidents access to the official proxy. Greg Taxin, CEO of proxy advisory company Glass Lewis, said the proposal overall was "a step in the right direction. More access and competition will create an environment of better representation." But Taxin believes the 5% shareholder requirement sets the bar too high. "That's a very hard group to gather. It would probably take 10 or more institutional investors, and that means it would very rarely be used."
In a move that had not been expected, the commission stated that the new rules can not be used to gain control of a company. Shareholders would be limited to one nominee on boards that have up to eight members, two nominees on boards of up to 19 members, and three nominees for boards that are even larger. Jamie Heard, who heads Institutional Shareholder Services, a rival to Glass Lewis, believes the 5% ownership requirement is reasonable, but said he thought the triggers should be dropped. "In a large company, 5% ownership means billions of dollars. It's very serious at that level, and that should be enough."
Once the SEC's proposal is published, the public will have 60 days to comment. It isn't clear when the commission will vote, but Donaldson said he would like the new regulations to affect the 2004 proxy season. If so, the soonest a dissident shareholder could be elected under the new rules would be the 2005 season.
But Rosemary Lally of the Investor Responsibility Research Center said that proxy proposals for the 2004 season need to be ready by November. If the rules proposed today are modified after shareholder proposals are written, it could mean a delay of another year. "We might not see this really working until the 2006 season. It's rather confusing right now," she said.
John Chevedden, an independent investor who has led many well-publicized proxy fights, said he was disappointed. "If it takes three years to hold someone accountable, that's not accountability," he said. "All in all, this is a snooze."
This the third time in 25 years that the SEC has considered changes to proxy rules. The commission made a few changes in the regulations in 1977 and 1992 and discussed shareholder access to corporate proxies but did not grant it. Wednesday's action is the first time a move to improve shareholder access to proxies has even gotten as far as a formal proposal before the board.
In May of this year, the SEC asked for comments on proxy issues and got 690 responses. The vast majority of those who commented supported modifying the proxy rules and regulations related to the nomination and election of directors. Commenters who did not support such a modification included all of the corporations and corporate executives, most of the legal community, and the majority of associations (mostly business associations), according to a SEC spokesman.
Jack Sylvia, a securities litigator with the law firm of Mintz Levin Cohn Ferris Glovsky & Popeo, said the reforms could provoke a host of unintended consequences. "Despite the safeguards, the reality is that this is a tool that could be abused by dissident groups with their own agenda. It could put a strain on the fiduciary duty of the board to all shareholders," he said.
So far, organized opposition to the reforms has been led by the Business Roundtable, an association of CEOs, which argues that the proposal may spark proxy fights at companies that have not abused the proxy process.
Using data collected by the Investor Responsibility Research Center, the group says that the number of shareholder votes has climbed in recent years, and so has the percentage of majority advisory votes.
As of late September, for example, 560 shareholder proposals had been voted on. Of those, 153, or 27%, garnered a majority vote. The year before, there were majority votes for 22.5% of 439 shareholder votes.
Although the proxy season won't begin in earnest until March, reformers speculate that companies that have rejected shareholder resolutions several times in a row are the most likely targets for proxy fights, should the commission give shareholders access to corporate proxies. According to the IRRC those companies include:
Alaska Air Group
Electronic Data Systems
Federated Department Stores
Starwood Hotels and Resorts Worldwide
The battles at those companies have largely been over three issues: ending staggered board terms, eliminating so-called poison pills and eliminating supermajority provisions.
Because many companies take two or three cycles to elect a full board, it will take some time for rebels even to have a chance to control their companies if the commission does indeed grant them access to corporate proxies.
, for example, elects four every year and added an eighth board member after acquiring J.D. Edwards. In this case, the nature of PeopleSoft's board will make it much more difficult for
to gain enough votes to win approval of its hostile takeover offer.