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March 10, 2004
Disney Vote and California Bill May Affect SEC Shareowner Director Nomination Rule
    by William Baue

The significant withhold vote at Disney and a bill being considered by the California State Legislature may have a bearing on the SEC's proposed rule on shareowner director nominations.

Today, the US Securities and Exchange Commission (SEC) is hosting a roundtable on its proposed rule to provide shareowners access to the proxy for nominating candidates to company boards of directors. The roundtable complements an extension to March 31, 2004 for the period that the SEC is accepting public comments on the proposal. The rule would require companies to include on their proxy ballot director candidates nominated by shareowners, subject to certain thresholds and triggering events.

"I suspect the SEC scheduled its roundtable thinking they might water down their already very weak nominating proposal," said James McRitchie, editor of corporate governance watchdog website Mr. McRitchie co-filed with the Committee of Concerned Shareholders the August 2002 rulemaking petition with the SEC that set this rule change in motion.

While many observers agree that the rule does not go far enough, Raul Campos, one of five SEC commissioners, defended the rule against those who say it goes too far by characterizing it as "a modest, modest proposal."

Roundtable panelist Martin Lipton of the law firm Wachtell, Lipton, Rosen & Katz characterized the proposal as a "serious mistake" in a November 2003 Business Lawyer article that is posted on a SEC webpage spotlighting the issue.

While this diversity of opinion is to be expected, developments beyond the control of the SEC and panelists may affect the rulemaking as much as the views expressed at the roundtable and in comment letters.

"The Disney vote adds pressure to go ahead" with the new rule, Mr. McRitchie told "Additional pressure will be brought to bear with measures such as California's AB 2752."

Earlier this month, 43 percent of Disney (ticker: DIS) shareowners withheld their votes to re-elect CEO Michael Eisner to the board. Ironically, the board responded by replacing Mr. Eisner's board chair position with George Mitchell, a former US senator from Maine, despite the fact that 24 percent of shareowners censured him by withholding their support. Current SEC regulations and state laws do not allow investors to actually vote against director nominees, who are exclusively nominated by management, only to withhold their vote. One of the triggers for shareowner access to the proxy nomination in the proposed rule is surpassing a 35 percent threshold of withhold votes.

Until the Disney vote, the 35 percent withhold threshold had not actually been surpassed. According to panelist James Heard of Institutional Shareholder Services (ISS), a proxy voting advisory firm, withhold votes for directors surpassed 30 percent last year at nine companies, including AOL-Time Warner (AOL), Boise Cascade (BCC), and Ryder (R). The Disney vote illustrates both the widespread shareowner dissatisfaction with board-nominated directors and also how difficult it is to surpass the proposed threshold.

Panelist Franklin Raines, chair and CEO of Fannie Mae (FNM), and co-chair of the Business Roundtable, a CEO association, called the 35 percent threshold too low, as democratic rule calls for majority votes. Some may feel, however, that requiring a plurality for nomination is contrary to the generally accepted definition of a democracy. Among other panelists, Ann Yerger of the Council of Institutional Investors (CII), an organization of large public, labor funds, and corporate pension funds, pointed out that the threshold is only a preliminary hurdle and that the election itself requires a majority vote. She additionally pointed out that, after adjusting for broker-directed votes, 55 percent of shareowners withheld support for Mr. Eisner.

State law may trump SEC regulation of director nominations. California Secretary of State Kevin Shelley recently sponsored state bill AB 2752, the Corporate Election Fairness Act of 2004, introduced by California Assembly member Judy Chu.

"AB 1752 wouldn't require triggers, nor would it impose a one year delay," said Mr. McRitchie. The triggering event clause of the proposed SEC rule effectively creates at least a one-year lag between the triggering event of one proxy season and shareowner access to the proxy the next proxy season. The proposed California bill also would allow shareowners or groups of shareowners that hold more than two percent of company stock for more than two years to nominate director candidates, much lower than the SEC's five percent ownership threshold.

"Shareowners frustrated with Mr. Eisner should back Ms. Chu's measure," Mr. McRitchie concluded


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