October 27, 2004
SEC Decision on Shareowner Nomination of Corporate Board Directors Still Pending
by William Baue
Supporters and opponents of the proposed SEC rule granting shareowner access to the proxy to
nominate directors advance their causes while the rule languishes in limbo.
On October 8, 2003, more than a year ago, the US Securities and Exchange Commission (SEC) proposed a new rule that would make it significantly
easier for shareowners to nominate candidates for the board of directors of companies they hold.
While this change would somewhat democratize an election system that critics have likened to the
old Soviet Russia form of government, it has met intense opposition from the business
community. Consequently, the rule has languished in limbo, as SEC Chair William Donaldson has
flip-flopped from vowing to enact the rule over opposition by two of his four fellow commissioners
to expressing doubt it will be enacted before the presidential election, if ever.
The void created by the SEC inaction has not gone unfilled. One SEC commissioner is
publicly railing against the delay. Four public pension funds have filed a shareowner resolution
at Disney (ticker: DIS) to implement the rule there
despite the fact is has not been broadly enacted. And just today, a public accountability
organization has released a report accusing the Bush Administration, under influence from companies
that vehemently oppose the rule, of applying pressure on the SEC to block implementation of the
In his October 8, 2004 speech at the Investor Responsibility Research Center (IRRC) annual meeting, SEC Commissioner Harvey
Goldschmid (one of two Democrats on the commission) did not hide his contempt for the lack of
enactment of the rule.
"The commissionís inaction to this point has made it a safer world
for a small minority of lazy, inefficient, grossly overpaid, and wrongheaded CEOs," Commissioner
Goldschmid stated. "So far, in my view, the worst instincts of the CEO community have triumphed."
A week later, four public pension funds owning 18 million shares of Disney stock filed a
shareowner resolution that would effectively enact the SEC proxy access rule at the company, which
has two open seats on its 11-seat board. Funds include the California Public Employees Retirement
System (CalPERS), the New York State Common Retirement Fund, the American
Federation of State, County, and Municipal Employees (AFSCME), and the Illinois State Board of Investment.
"While this tool would be used infrequently, Disney is a classic example of a case for when
proxy access would be appropriate," said Gerald McEntee, chair of the AFSCME Pension Fund. More
than 43 percent of Disney shareowners withheld votes for CEO Michael Eisner's reelection to the
board, surpassing the proposed rule's 35 percent threshold triggering shareowner access to the
proxy for nominating director candidates.
"We look forward to Commissioner Donaldson's
support this fall," he added, predicting support that may or may not materialize.
Commissioner Donaldson's change of heart over enacting the proxy access rule may seem puzzling, a
released today by the watchdog organization Public Citizen argues that the Bush Administration strong-armed
the SEC into the delay. The report documents significant financial ties between the Bush
Administration and companies that lobbied heavily to block the rule.
"The 205 corporations
opposed to the shareholder access rule and their employees contributed $55.5 million to Bush's
campaigns, the Bush-Cheney Inaugural Committee, and the RNC [Republican National Committee] during
the past three election cycles," states the report.
The report also cites evidence of
influential meetings between Administration officials and the SEC.
administration dispatched Treasury Secretary John Snow [ . . . ]to pressure SEC officials to weaken
the shareholder access rule," the report states. "According to one senior commission official,
Snow served as the White House point man in making sure 'the views of an administration eager to
court the chief executives during an election year have been made clear to the chairman.'"
"Multiple SEC officials told four separate reporters that Snow let it be known that the White
House does not want the rule to proceed," the report adds.
Interestingly, the report also
demonstrates how companies that oppose the rule have some of the worst performing boards, making
them the most vulnerable to shareowner action to replace poorly performing directors under the rule
if it is ever enacted.
"Forty-six percent (90 of 197) of the corporations opposed to the
shareholder access rule received a 'D' or an 'F' grade for Overall Board Effectiveness from the
Corporate Library," the report states. The Corporate Library (TCL) is an independent research firm that
specializes in corporate governance issues. "Poor 'Overall Board Effectiveness' rankings are based
on actual board actions which, according to the Corporate Library, indicate a 'likelihood of
investor or underwriter loss.'"