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December 23, 2008
Investors Ask Obama to Improve Corporate Financial Disclosure
    by Robert Kropp

President-Elect is asked to return SEC to original mission of protecting investors and strengthening shareowner rights.

According to the mission statement of the Securities and Exchange Commission, the goal of the agency is to "protect investors." Furthermore, it will "strengthen the integrity and soundness of U.S. securities markets for the benefit of investors." And in implementing the laws which it was created to enforce, the SEC "requires public companies to disclose to the public meaningful financial and other information so that investors may judge for themselves if company’s securities are a sound investment. Only through the steady flow of accurate, comprehensive, and timely information can the public make informed investment decisions."

But for the last five years, "the SEC has gradually been closing the door to important shareholder concerns," according to a letter signed by 60 investors and sent to President-Elect Barack Obama. "Shareholder proxy requests that had been allowed in previous years asking for better disclosure of financial risks to companies have been stymied," the letter went on to assert.

Laura Berry, Executive Director of the Interfaith Center on Corporate Responsibility (ICCR), an association of 275 faith-based institutional investors, said, "Since 2003, the SEC staff has narrowed the lens through which risk-evaluated issues can be included in proxy statements. Yet as long-term shareholders we consider it our fiduciary responsibility to consider external factors which may have an impact on a company's financial performance."

Berry referred to what she called "one exquisite example" of the SEC's "bad judgment since 2003." Last year, ICCR was among the shareholders asking Washington Mutual to discuss its potential financial exposure as a result of the mortgage securities crisis. The proposed resolution was struck down by the SEC. Then, in September, the Office of Thrift Supervision seized the assets of Washington Mutual and sold the bank to JPMorgan Chase. The debacle ranks as the largest bank failure in American banking history.

Berry said, "In 1993, ICCR introduced six shareholder resolutions warning of the effects of predatory lending practices, all of which the SEC allowed. If the SEC had continued to maintain this position, we night have stopped this catastrophic erosion of people's retirement benefits and the necessity of the bailout."

According to SEC Staff Legal Bulletin No. 14C, shareowner proposals face exclusion if they "focus on the company engaging in an internal assessment of the risks or liabilities that the company faces as a result of its operations that may adversely affect the environment or the public's health." However, the SEC allows proposals that "focus on the company minimizing or eliminating operations that may adversely affect the environment or the public's health."

According to the letter sent to Mr. Obama, "The adoption of this new bar on resolutions requesting 'risk evaluation' represented a significant departure -- disregarding the reasonable and principled approach that had governed at the SEC for decades, and replacing it with a radical interpretation of the rules. The result has been to limit shareholder resolutions to questions about the impact that companies are having on society in general, excluding vital questions about the impact that any of these issues may have on the company’s future finances."

Sanford Lewis, an attorney who represents shareowners and a driving force behind the investors' letter, said, "The SEC has always allowed the discussion by shareholders of public policy issues. But it has barred certain activities that it designates as ordinary business. Chief among these is shareholder efforts to micromanage the daily operations of a company. In the last five years, however, the SEC has gone beyond that to treat as ordinary business the efforts of shareholders to determine the financial risks to companies from public policy issues, in areas such as the environment and even mortgage securities."

Coupled with an Administration viewed by many as overly protective of corporate interests at the expense of those of shareowners, the SEC actions have complicated the effort of socially responsible investors to force companies to adopt sustainable practices and practice corporate responsibility.

Stu Dalheim, Director of Shareholder Advocacy at the Calvert Group, a fund company that includes a number of prominent SRI funds, pointed out an example of the chilling effect such semantics can have on shareowner efforts to exercise oversight responsibility.

"Because of climate change concerns, last year we filed a resolution asking that OGE Energy's Board of Directors provide a report describing how the company assesses the impact on it of climate change. We requested that the company provide such information through reporting mechanisms such as the Carbon Disclosure Project (CDP)."

OGE Energy "argued that such an evaluation of climate risk would amount to an assessment of the company's day-to-day financial operations," said Dalheim. "Even though the risk of climate change would seem a fundamental issue in the case of an energy company dealing in fossil fuels, the SEC found in favor of the company," and disallowed the introduction of the resolution.

"To label such proposals as nuisances prevents responsible shareholders from asking companies to perform risk assessments, and hampers us from getting the support of mainstream investors," Dalheim continued.

Asking for strong leadership from the White House and Congress to encourage the SEC to "retract the staff-created prohibition on resolutions that ask companies to evaluate the financial impacts of identified issues," the investors' letter asserted that "effective disclosure of these issues through the proxy process can lead to better anticipatory action by corporations such as the control of greenhouse gases and the development of safer alternative materials."

The letter was sent on December 11 to the incoming Administration's transition team through the web site, and will be forwarded to Mary Shapiro, Obama's choice for Chairperson of the SEC. As of this writing, no response has yet been received by the investors' group.

"In the current atmosphere, it is important to realize that government cannot catch every problem," Lewis said. "It is equally important to allow shareholders to police the risks encountered by corporations. We need a marketplace of ideas in the proxy process, and the view of the SEC over the last five years has censored it. The marketplace of ideas needs to be restored."


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