The Battle Brewing Over Director Elections

The corporate-governance battle looming over Washington this fall revolves around the issue of proxy access. Last July, the Securities and Exchange Commission made good on a pledge by Chairman Christopher Cox to address shareholder demands for greater access to proxy ballots. But the two proposals voted on by the divided commission flatly contradict each other, with one allowing companies to continue excluding shareholder nominations to the board from corporate ballots and the other restricting them through tight guidelines.

Shareholder activists have responded by saying that the second proposal is so onerous it provides virtually no access at all. Two groups, the Social Investment Forum and the Interfaith Center on Corporate Responsibility, formed a lobbying campaign called Save Shareholder Rights that aims to kill the first idea and revamp the second one.

The skirmishing will intensify after October 2, when the SEC’s comment period on the two new proposals ends and Cox will have to decide whether to go ahead with one or the other. The most likely near-term outcome is a victory for the business community, which generally opposes greater access as likely to trigger costly and divisive battles over board seats. The reason: Roel Campos, one of the two Democratic commissioners who voted for the second proposal, resigned in September.

Until Campos is replaced, the most shareholder groups are likely to get is the status quo—i.e., no action on either idea, which suits business just fine. In fact, the activists will be lucky if neither proposal passes in its current form, since the first would leave shareholders with no access to proxy ballots, while the second would leave them with access few could probably use in light of its stringent rules. “I don’t see how the access proposal moves without a second Democrat on the commission,” says Michael Ryan, executive director of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness.

Still, there’s plenty of uncertainty, especially since Cox has said he wanted new access rules in place by the end of the fall, in time for the 2008 proxy season. In an apparent attempt to be bipartisan, the chairman voted for both proposals, despite their contradictory nature.

Let Bylaws be Bylaws

The conflict over board nomination procedures arose out of a federal appeals court ruling last year that invalidated a 1990 SEC policy on the issue. It allowed companies to exclude shareholder director nominations from their proxies. In response to the ruling, the SEC staff drafted the second proposal that under strict circumstances would permit bylaw changes enabling stockowner proxy access.

At the last minute, the five commissioners received the first proposal to reinstate the agency’s 1990 position. That would seem like a direct challenge to the appeals court, given that it rejected the SEC’s amicus brief last year defending this same stance. However, Paul Atkins and Kathleen Casey, the two Republican commissioners who backed the idea, argue that the courts are likely to defer to a formal rule passed by the SEC.

Either way, the first proposal helps business by making the second one look like a more radical departure from current practice—even though the shareholder groups seeking access reject it as deficient. Indeed, the second proposal, as it now stands, rankled not just the social activists who formed Save Shareholder Rights, but also more mainstream groups such as the Council of Institutional Investors (CII).

The proposal would allow bylaw changes on proxy access to be put on a company’s ballot by an ad hoc group of investors who collectively have owned a minimum of 5 percent of a company’s stock for at least a year. However, each investor involved would be required to disclose a raft of information. For starters, they’d have to file a 13G, the SEC schedule that requires all stockholders with 5 percent ownership to identify themselves and their interactions with the company.

That’s just the beginning. Each investor also would have to disclose any direct or indirect interest in any contract with the company or an affiliate, including collective bargaining, consulting, or employment agreements; pending or threatened litigation they’re involved in that regards the company; and any other “material relationship” with the company or an affiliate, such as a past employment relationship and other stipulations.

Investors also would have to detail which staffers, trustees, or board members were involved in the decision to pursue the bylaw change, how they were chosen for their jobs, and any fiduciary responsibilities they have.