June 11, 2003
Shareowner Advocates Tell SEC How Best to Democratize Board Election Process
by William Baue
The question is not whether shareowners should have access to the proxy to nominate directors, but
what percentage of stock ownership qualifies shareowners to make nominations.
Last April, the U.S. Securities and Exchange Commission (SEC) issued a release on the matter of
allowing shareowners equal access to the process of nominating candidates to the board of
directors. The release announced that the SEC would allow Citigroup
(ticker: C) to omit from its proxy ballot a shareowner resolution requesting permission for
shareowners to nominate candidates for the board of directors.
In the same
release, however, SEC chair William Donaldson announced that the commission would conduct a
"thorough review" of the process of soliciting, nominating, and electing directors. The SEC is accepting public comments on
the issue through this Friday, June 13th.
Currently, shareowners are legally allowed to
nominate candidates to the board of directors, but there is no viable mechanism for them to do so.
Corporations are not required to list shareowner-nominated candidates on the proxy ballot. In
practice, a board nominates only one candidate for an open seat, a system that many experts
criticize as preventing the election of truly independent directors and resembling not democracy
but Stalinesque communism.
Many comments have already been posted to the SEC
in support of reforming the system. Despite general agreement on granting shareowners the right to
nominate candidates, there is a wide range of opinion on what criteria should be used to determine
a legitimate candidate.
Most supporters believe that nominations should come from an
aggregate group of shareowners that surpass a threshold percentage of stock ownership.
Both the California Public Employee
Retirement System (CalPERS) and the Council of
Institutional Investors (CII) suggest a five percent threshold. The AFL-CIO favors a three percent threshold, as does the American Federation of State, County and Municipal
Employees' Pension Plan (AFSCME), which filed the Citigroup resolution and has published a white paper on
the equal access issue. The Social
Investment Forum (SIF) and Responsible Wealth, which represents "a network of
hundreds of affluent Americans," advocate a one percent threshold.
"There's no magic
number or arithmetical formula," said SIF President Tim Smith. "What they're proposing is based
more on instinct."
"If anybody can nominate, there's a legitimate fear from some quarters
that a lot of 'nuisance candidates' who don't have meaningful support will clutter up the proxy,"
Mr. Smith told SocialFunds.com.
However, there's also a legitimate fear that instituting
thresholds will defeat the goal of creating a truly democratic mechanism.
"A three or five
percent stock ownership threshold is impractical," said Les Greenberg, chair of the Committee of Concerned
Shareholders, which co-filed the original rulemaking petition asking the SEC to
allow shareowner nominations access to the proxy. "Few have bothered to ask who will be able and/or
willing to participate if such a threshold were enacted."
"Recently, ten major pension
funds [including CalPERS and the California State
Teachers' Retirement System (CalSTRS)], uniting for the purpose of requesting a meeting with Unocal (UCL)--a
much less difficult task than nominating director candidates--could only muster a combined
ownership of 1.6 percent of the stock," Mr. Greenberg told SocialFunds.com.
of Concerned Shareholders promotes a threshold based on an existing system with a proven track
record: SEC Rule 14a-8, which governs the filing of shareowner resolutions. Shareowners wishing to
file a resolution must own a minimum of $2000 in stock for at least one year.
interesting that the SEC allowed Citigroup to omit AFSCME's shareowner resolution, which asked for
inclusion of shareowner-nominated director candidates on the company's proxy, based on a subsection
of Rule 14a-8 that bars director nominations. AFSCME defended its resolution on the grounds that
it did not actually nominate directors, which the rule clearly disallows, but rather addressed the
process of nominating directors.
The April release by the SEC sends mixed signals,
both stifling AFSCME's attempt at reforming the director election process and concurrently
promising to consider possible reforms, so it is difficult to gauge how the commission will
ultimately decide on this issue.