July 18, 2003
SEC Report on Shareowner Nomination of Directors Opens Some Doors, But May Close Others
by William Baue
A recent SEC report recommends several solutions for allowing shareowners access to director
nominations, but social investors worry it may not solve some problems.
Earlier this week, the U.S. Securities and Exchange
Commission (SEC) released a report written by its Division of Corporation Finance on rules and
regulations that govern director nominations. The staff report recommended improved
disclosure of the director nomination process and improved shareowner access to the proxy card for
nominating director candidates.
"We have worked and continue to work with the
markets to put in place listing standards and rules that increase both the role of independent
directors and the voice of shareholders," said William Donaldson, chair of the SEC. "The next step
is to assure that the proxy process reinforces these important advances."
asked the staff to prepare rule proposals for each of the five alternative solutions recommended in
the report. He expressed hope that the Commission will be able to generate disclosure-related
proposals as early as August and proposals related to proxy access for shareowners as early as
September. He also said he looks forward to hearing public discussion on the proposals.
"It was a very thorough and good-faith staff report on the part of the SEC," said Julie Gorte,
director of social research for the Bethesda, Maryland-based Calvert Group, one of the country's largest socially
responsible investment (SRI) firms. "Reading the SEC tea leaves, it's very encouraging that they
immediately, almost on the heels of the closure of the comment process, issued a staff report and
said, 'Yeah, we're going to issue some rulemakings.'"
Ms. Gorte pointed out the near
consensus on certain issues that are not substantial enough to warrant further consideration.
"Nobody's in favor of opening the doors and saying, 'Anybody who wants to nominate should be
able to do it,'" Ms. Gorte told SocialFunds.com. "That's clearly unworkable and kind of stupid and
would be a waste of time."
Instead, the public discussions Chair Donaldson encourages
should consider substantive issues, such as what kinds of protections the SEC should provide so
that opening the director nomination process does not become a backdoor for takeovers, according to
Of the five alternatives recommended by the SEC, which include delivering to
shareowners nominating proxy cards along with company proxy materials and revising Exchange Act
Rule 14a-8 to allow shareowner resolutions on the nominating process, Ms. Gorte favors only one.
The option requiring companies to include shareowner nominees in the company materials is the only
alternative that makes sense as far as adequate access to the ballot, according to Ms. Gorte.
The SEC report also includes an appendix that summarizes the 609 comment letters received
during the public comment period between May 1 and June 13 of this year.
majority of responses supported a change to the proxy rules to allow shareholders to access company
proxy materials to include nominees to the board...," the appendix states.
comment letters, however, all opposed shareowner access to the proxy, citing many of the same
"Intel is one of the companies that opposed shareholder access to the proxy,
which kind of surprised me, because Intel is a pretty 'out-there' company in terms of corporate
social responsibility," said Ms. Gorte, referring to the company's reputation for placing
importance on its social and environmental performance.
"[T]he requirements of
Sarbanes-Oxley and the revised stock exchange listing requirements are barely in place and ought to
be given time to work before considering a revamp of the proxy rules to 'fix' perceived problems
when the solutions may already be in place and in the process of implementation," states Cary
Klafter, vice president of legal and government affairs at Intel (ticker: INTC), in a comment letter to
Nearly all the corporate commenters who opposed shareowner access to the proxy,
Laboratories (ABT), Agilent Technologies (A), Ashland (ASH), CSX (CSX), ExxonMobil (XOM), GM (GM), and Viad (VVI),
followed the same line of reasoning.
Ms. Gorte is critical of that stance.
"Look, we had a huge problem, we passed a major piece of legislation, but it was drafted very
quickly, and even the people who wrote Sarbanes-Oxley didn't think it addressed all the problems,"
Ms. Gorte said. "All of us who observed the corporate governance scandals over the last few years
knew it was going to take a village to solve this problem, and there were lots of things that
needed to be done--Sarbanes-Oxley was only one."
Intel representatives did not respond to
requests for their commentary.
Ms. Gorte also criticized the SEC report for suggesting
that shareowner access to the proxy for nominating directors should result only after so-called
triggering events, or problems that require such measures.
"Essentially, that amounts to
closing the barn door after the horse is out--you wait until something bad has happened and
then you have access to the ballot?" Ms. Gorte asked rhetorically. "Why should management
have to screw up in order for shareholders to have some say in who their representatives are?"
"It's kind of like saying you can only vote for a senator if the U.S. government screws up,"
she added. "If that were the case, we'd be in deep doo-doo."