October 09, 2003
SEC Opens Proxy to Shareowner-Nominated Directors, Critics Bemoan Triggers, Thresholds
by William Baue
New SEC rules will allow shareowners to use companies' proxies to nominate director candidates, but
corporate governance advocates point out potential pitfalls.
Yesterday, the US Securities and Exchange Commission (SEC) approved rule proposals to allow
shareowners access to corporate proxies to nominate candidates to boards of directors. Most
observers joined SEC Chair William Donaldson in characterizing the move as historic, though some
describe the rules as merely a step in the right direction. The rules will be posted within the
next few days on the SEC website.
The Council of Institutional Investors (CII), the AFL-CIO, and the Social Investment Forum (SIF), among others, believe that
further steps will be necessary to achieve true shareowner representation on boards.
"Though this proposal is another important step toward advancing shareholders' interests, the
Council has concerns with the proposed triggers," reads a CII statement on the rules.
proposed triggering mechanism requires one of two events to occur. One event is if more than 35
percent of voting shareowners abstain or withhold their votes for the election of one or more
directors. The other event is if a group of shareowners that hold more than one percent of the
company's stock for one year file a shareholder proposal formally requesting to nominate a director
candidate. That proposal would need to receive support from a majority of voting shareowners at
the next annual meeting. If majority support is received, the director candidate is qualified for
possible inclusion in the subsequent year's proxy ballot.
"[These] triggering requirements
that would make it difficult for even the largest investors to use them, and impossible to do so in
a timely manner," said John Sweeney, president of the AFL-CIO.
James McRitchie, the
editor of the corporate governance watchdog website CorpGov.Net, provides colorful analogies illustrating the
dilatory effect of such triggers.
"Under the proposed rule, two-year triggering events
essentially allow the alarm to be installed after the corporation is burgled," said Mr. McRitchie,
paraphrasing California State Treasurer Phil Angelides. In August 2002, Mr. McRitchie joined the
Committee of Concerned
Shareholders in filing the original rulemaking petition with the SEC that
set this rule change in motion. "The two-year triggering event will often mean the corporation has
done a lot of bleeding before shareholders can place their nominees on the board."
"Shareholders should be able to use the nomination process to point to nascent problems, not
just obvious plundering," he added.
The Social Investment Forum and its Shareholder Action Network (SAN) similarly question
the triggers, and also oppose the rules' proposed share ownership thresholds for nominating, which
call for holding more than five percent of company stock for two years.
advocates a threshold of share ownership of not more than three percent for investors to have the
automatic right to propose board nominees," said Tim Smith, president of SIF.
McRitchie cites the example of a shareowner campaign targeted at Unocal (ticker: UCL) to illustrate how even such a
seemingly low threshold may prove difficult to achieve.
"It took ten huge funds,
including CalPERS and CalSTRS, to muster 1.6 percent of the shares at Unocal," said Mr. McRitchie.
"Thresholds should be more like $2,000 to propose a trigger (the same as for filing resolutions)
and one percent to propose candidates."
The proposed rules also limit the number of
nominations shareowners could make, according to the size of the board: one candidate for boards of
eight or less and three candidates for boards of 20 or more, with two nominees for boards between
these in size.
"The limit on the number of nominees is too low--in close to half of all
companies listed, the SEC would limit shareholders to a single candidate, a voice in the
wilderness," Mr. McRitchie said. "If we're going to limit the number of shareholder nominated
directors in any given year, it should be simply a minority of the board."
The SEC will be
accepting public comments on the proposed rules for the 60 days following their imminent
publication in the Federal