Big business challenges SEC over boardroom democracy

McClatchy NewspapersSeptember 29, 2010 

WASHINGTON — Two influential corporate interest groups filed a federal lawsuit Wednesday attempting to block a provision of the recently passed overhaul of financial regulation that would give shareholders more say in the boardroom.

The U.S. Chamber of Commerce and the Business Roundtable filed an administrative challenge asking the Securities and Exchange Commission to halt its implementation of new rules announced on Aug. 25 for the selection of corporate boards. The pair also petitioned the U.S. Court of Appeals for the District of Columbia for immediate review.

The two powerful associations allege that the SEC has, arbitrarily and without regard to the cost to businesses, implemented new "proxy access" rules to allow dissident shareholders to run their own slates of candidates for a corporation's board of directors. The SEC responded Wednesday afternoon with a statement denying the allegation.

"We believe that the commission's proxy access rules are both lawful and in the best interests of the public and shareholders. The commission will, of course, carefully consider and timely respond to the motion for a stay," said John Nester, an SEC spokesman.

Critics say that allowing a competitive slate to be put forth by a shareholder or group of shareholders owning more than 3 percent of a company's stock would give enormous new influence to labor unions, many of which have union-run pension funds.

Proponents, however, say that corporate boards are often chummy with management and often don't have the best interests of shareholders at heart. Allowing dissident slates would allow shareholders a greater say on executive pay and other areas of company policy.

Corporate boards are supposed to act as a check on management, but in recent years they've come under intense criticism for being inattentive. Boards drew scrutiny after the collapse of energy giant Enron Corp. in 2001, and after the collapse of Wall Street financial firms in September 2008, questions about boardrooms rose anew.

Reporting by McClatchy, for example, has since shown that board members at Moody's Investors Service didn't understand the firm's complex rating process for mortgage bonds. They not only failed their shareholders, but also enabled the abuses that nearly brought down the financial system, yet these directors continued to support the company's failed chief executive.

That argument carried the day in Congress, where the issue, while controversial, was largely overshadowed by bigger debates over what's now called the Dodd-Frank Act after its primary sponsors, Sen. Chris Dodd, D-Conn., and Rep. Barney Frank, D-Mass.

The SEC has moved quickly, after a comment period, to take a step toward boardroom democratization.

"Our rules will result in a greater number of nominees appearing on a proxy card. Shareholders will continue to have the opportunity to vote solely for management candidates, but our rules will also give shareholders the opportunity to vote for director candidates who otherwise might not have been included in company proxy materials," the SEC said in its 451-page rule issued after a 3-2 split vote on Aug. 25.

The debate affects all publicly traded companies in the U.S., large or small. Under current practices, directors are nominated by management and shareholders vote them up or down. It's highly unusual for proposed board members to be rejected.

More than half of the roughly 10,000 U.S. corporations regulated by the SEC are incorporated in Delaware, which has mechanisms in its state laws for shareholders collectively to seek alternate slates of candidates.

The Dodd-Frank Act gave the SEC powers to make it easier for dissident shareholders who individually or collectively own 3 percent of a company's stock to run alternate candidates for the board.

The Chamber of Commerce and the Business Roundtable, which represents the top executives of major corporations, fear that this gives union-run pension funds a way to disrupt the internal affairs of companies while seeking to organize workers.

"This special-interest rule will give small groups of special interest activist investors significant leverage over a business' activities," David Hirschmann, the chief executive of the Chamber's Center for Capital Markets Competitiveness, said at a news conference announcing the suit.

Opponents also complain that election contests are expensive, in some cases upwards of $14 million for contentious proxy fights. Dissident shareholder interests vary widely from management objectives.

"Funds (tied to unions) often have other objectives than profit maximization . . . so the cost analysis that was performed by the commission, in our analysis, did fall short," said Eugene Scalia, hired by the two associations to take on the SEC. Scalia was a top lawyer at the Labor Department in the Bush administration and is the son of Supreme Court Justice Antonin Scalia.

Senate Banking Chairman Dodd, who authored the landmark regulatory legislation, declined to comment Wednesday, saying he hadn't seen the lawsuit yet.

(David Lightman contributed to this article.)

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