September 25, 2002
SEC Chair Proposes Eliminating Ordinary Business Exception in Proxy Rules
by William Baue
SEC Chairman Harvey Pitt proposed abolishing a rule that allows companies to exclude shareowner
resolutions from their proxy statements because the resolution concerns the companies' day-to-day
On Monday, Securities and Exchange Commission
(SEC) Chairman Harvey Pitt proposed changes to proxy rules in a speech before the Council of Institutional Investors (CII). CII members, which
include public, Taft-Hartley, and corporate pension funds, applauded after Chairman Pitt suggested
eliminating SEC rule
14a-8(i)(7). This rule allows companies to omit from their proxy statements shareowner
proposals that deal with "ordinary business," or matters that are of concern to management, not
"Indeed, I've asked our Director of Corporation Finance, Alan Beller,
to consider a proposal to eliminate the 'ordinary business exception' from the list of reasons that
companies can exclude otherwise validly promulgated shareholder proposals," said Chairman Pitt in
the speech. "It is my hope that we can eliminate this exception, making shareholder suffrage a
reality, and sparing our Staff from trying to resolve what is, or isn't, within the purview of
ordinary business issues facing public companies."
Currently, a company can submit a
"no-action" letter to the SEC, which asks if it can exclude a shareowner resolution from the proxy
statement. SEC attorneys then either affirm or deny the company's request. Companies often invoke
the ordinary business exception in their no-action letters.
In the 2002 proxy season so
far, the SEC applied the ordinary business exception to 30 corporate governance resolutions and 15
social shareowner resolutions, according to the Investor Responsibility Research Center (IRRC). IRRC tracked more
than 552 shareowner resolutions submitted in last year's proxy season.
This new proposal, if adopted, could help pressure
companies to be more transparent. Chairman Pitt gave stock option accounting as a specific example
of an issue that can no longer be considered ordinary business. Companies often do not report or
assign value to stock options in executive compensation packages, arguing that the options have no
specific monetary value until redeemed. Oftentimes the options are not redeemed for years.
However, recent scandals have exposed the fact that stock option largesse can dilute shareowner
value and enable executives to line their pockets at the expense of ordinary shareowners.
In an August 12, 2002 letter to the
SEC, Social Investment Forum (SIF) President Timothy Smith and Calvert Group Director of Social
Research Julie Gorte expressed their concern about that same issue. On July 19, 2002, the SEC
allowed National Semiconductor
(ticker: NSM) to omit a stock option expensing resolution filed by the United Brotherhood of
Carpenters Pension Funds. The SEC ruled the company's choice of accounting methods to be ordinary
"[W]e find this decision extraordinary . . . ," wrote Ms. Gorte and Mr.
Smith. "Never, in recent history, has the subject of executive compensation been less a matter of
'ordinary business' . . . That the SEC opted to regard this proposal as a matter of 'choice of
accounting method' is equally extraordinary, given the accounting abuses and earnings restatements
that have characterized so much of the business news over the past three years."
Pitt at present favors a total elimination of the ordinary business exclusion, according to SEC
spokesperson John Nestor.
"However, if, after studying it, the Division of Corporate
Finance makes a compelling case for some sort of limited use of [the ordinary business exclusion,
Chairman Pitt] is willing to consider it," Mr. Nestor told SocialFunds.com.
proposed rule change would undoubtedly lighten the load of the already-overburdened SEC, companies
will most likely experience an increase in the number of shareowner proposals they must publish in
their proxies. Rule 14a-8(i)(7) has acted to inhibit the filing of shareowner resolutions that may
end up rejected on ordinary business grounds, according to IRRC Director of Governance Research
Carol Bowie. While this effect filters out resolutions that some might consider frivolous, it also
prevents resolutions with true merit from making it onto proxies.
"Companies worry that
their proxy statements will balloon to the size of phone books," Mr. Smith told SocialFunds.com.
"However, this may be the price of democracy."