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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 rule.

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.

While Commissioner Donaldson's change of heart over enacting the proxy access rule may seem puzzling, a report 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.

"The Bush 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.'"


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