February 11, 2005
Mixed Messages and Flip-Flops as the SEC Director Nomination Rule Stagnates
by William Baue
While the SEC retracts its promise to allow shareowners to file director nomination resolutions,
lawsuits secure shareowner rights to nominate directors.
Investors, particularly those holding Ashland (ticker: ASH), Microtune (TUNE), and MCI (MCIP--formerly WorldCom), as well
as Halliburton (HAL), Qwest (Q), and Verizon (VZ), are getting mixed messages
regarding shareowner nomination of director candidates. On the one hand, lawsuit settlements in
cases involving corporate governance failures require the first set of companies to allow
institutional investors to nominate directors. On the other hand, this week the staff at the US
Securities and Exchange Commission (SEC) Division
of Corporate Finance allowed the latter companies to omit resolutions calling for shareowner access
to the proxy to nominate directors.
The ironic twist is that the resolutions were
filed in direct compliance with the SEC's own guidance in the October 2003 rule proposal for granting shareowners
access to the corporate proxy to nominate directors under certain circumstances. The Business Roundtable and the US Chamber of Commerce, which both
represent corporate interests, have lobbied intensively against the rule proposal, stalling the
rulemaking process for over 15 months.
The proposed rule stipulates certain triggering
of which is the filing of a resolution (or "proposal" in SEC parlance) that would grant shareowners
holding more than one percent of the company's stock the power to nominate directors.
staff has informed [the Commission] that it intends to take the position that such a proposal is
not excludable under Exchange Act Rule 14a-8(i)(8)," states footnote 74 to the proposed
rule. Rule 14a-8
regulates shareowner resolutions, and section (i)(8) addresses resolutions on director elections.
The "no-action" letters issued to Halliburton, Qwest, and Verizon allowing them to exclude
the resolutions from their proxies seems to directly contravene this provision, which allows
shareowners to submit such resolutions until the rule is enacted.
"Given the passage of
time since the proposal of rule . . . without Commission action on that proposal," writes Alan
Beller, director of the SEC Division of Corporate Finance, in his letter to Halliburton, the
provision preventing exclusion "is no longer necessary or appropriate."
In other words,
the SEC is using its own delay in enacting the rule as an excuse to circumvent its own provisional
"The SEC has flip-flopped," said Rich Ferlauto, director of pension and
benefit policy at the American Federation of State, County and Municipal Employees (AFSCME), which filed the resolution with
Halliburton. "After they announced the rules of the game, they've changed the rules of the game."
"Our response is that this now obligates the commission to not hide behind the staff
action process but to propose a final rule or propose a new interim rule that we can all discuss,"
Mr. Ferlauto told SocialFunds.com. "We intend to move forward filing resolutions
company-by-company and to press the Commissioners to establish what the rules of the game are
regarding director elections."
Why is it that shareowners of Ashland, Microtune, and
WorldCom (now MCI) are perforce permitted to nominate directors, while shareowners of Halliburton,
Qwest, and Verizon are disallowed from even addressing the possibility of nominating directors?
What distinguishes these sets of companies?
The former companies all experienced corporate
governance meltdowns, and the primary remedy prescribed is shareowner nomination of directors.
Preventative medicine promotes the idea of addressing problems proactively, before they
metastasize into cancers.
"The call for proxy access reached a crescendo because of the
litany of corporate scandals that even Sarbanes-Oxley hasn't prevented," said Mr. Ferlauto, citing
the recent corporate governance implosions at Fannie Mae (FNM), Freddie Mac (FRE), and
HealthSouth (HRC). "The actions we're taking are
at individual companies where we believe boards have failed, and all we're asking is for the chance
for shareholders to vote on whether there should be a proxy access process in place because their
boards have not been responsible."
"There need to be boards that feel empowered to
seriously monitor and challenge management in order to protect shareholders, because regulation
isn't doing the trick," he added.
Besides filing shareowners resolutions that essentially
seek to enact the rule proposal at individual companies (as directed by the SEC before this week's
reversal), investors are also organizing campaigns to withhold votes for board-nominated director
candidates. Last year, such campaigns sent a loud message (though they are impotent in actually
preventing a director from being elected).
More than 60 percent of Federated Department
shareowners withheld votes for nominees Joseph Neubauer and Joseph Pichler. Michael Eisner was
censured last year by more than 45 percent of shareowners at Disney (DIS), which hosts its annual meeting
today under much less tense circumstances now that Mr. Eisner has agreed to step down as CEO. Less
than 8 percent of shareowners withheld their vote for Mr. Eisner this year, mostly because proxy
advisory firms such as Institutional Shareholder Services (ISS) that opposed him last year did not have the same
reason to oppose him this year.