SEC is increasingly divided over more corporate reforms

Path to better corporate democracy bogs down as business leaders complain

July 14, 2004|By Jonathan Peterson | Jonathan Peterson,LOS ANGELES TIMES

WASHINGTON - Securities and Exchange Commissioner Harvey J. Goldschmid had a warning for Chairman William H. Donaldson when regulators announced plans to give shareholders more clout in corporate elections.

"I remember saying to him this may create a firestorm, but it's the right thing to do," Goldschmid recalled. The SEC proposal, he added in an interview, is both "moderate and fair."

Critics of various stripes might object to that description. But on this much everyone agrees: Goldschmid was right about the firestorm.

The SEC proposal - touted as a path-breaking step toward corporate democracy - has bogged down in controversy.

Once expected to be a fait accompli by early this year, its survival is now in question.

Although the details have been in flux, the basic idea is to give large investor blocs limited power to field dissident nominees for the board, and to do so with a company's official election materials.

Backers say that would give major shareholders powers that are long overdue. Critics contend that it would allow narrow interests to disrupt company management.

Donaldson, the SEC's Republican chairman, has been caught in the middle, struggling to avoid a confrontation with the business community as the sides have grown more polarized.

In a recent speech at Stanford University, Donaldson complained that "the escalating, shrill and fearful rhetoric on all sides of this issue has drowned out thoughtful discourse and comment. Let's not mock those who struggle to find middle ground."

Lately, that middle ground has proved elusive for the SEC on other issues.

The commissioners are scheduled to vote today on a proposal that would give the agency its first, limited role in regulating hedge funds, a type of private investment partnership that caters to wealthy, sophisticated investors. Hedge funds have played a central role in the alleged trading abuses roiling the mutual-fund industry.

Donaldson supports at least some oversight and is likely to join with Democrats Goldschmid and Roel C. Campos for a majority vote in the five-member panel. The two other Republicans are expected to dissent.

That same divide emerged in June when the SEC split 3 to 2 in favor of a plan that would require mutual fund boards to be headed by independent directors.

The shareholder proposal is more divisive than the hedge fund and mutual fund rules.

Opposition from the Republican-oriented business community is passionate. John F. Kerry, the expected Democratic nominee for president, and his chosen running mate, John Edwards, have endorsed the idea.

"This is a kind of supercharged environment right now in the months leading up to the election," said Patrick S. McGurn, special counsel with Institutional Shareholder Services, an investor advisory firm, explaining Donaldson's caution. "The last thing the SEC wants is for this to get politicized in the broader sense, outside of their control."

Currently, shareholders have few options if they wish to kick out a board member. They may withhold their votes, a symbolic gesture that can focus sharp pressure if the boycott is big enough.

In the case of the Walt Disney Co., for example, Michael D. Eisner resigned as board chairman after 43 percent of votes were withheld, although he held on to his job as chief executive.

Such episodes are rare, however, and alternatives for unhappy shareholders, such as fielding dissident candidates, can be prohibitively expensive. Given that reality, the SEC last fall unveiled its complex proposal to improve the odds for shareholders.

A new vote for the board could be triggered if shareholders collectively holding 1 percent of a company's shares proposed a challenge and then managed to win support from a majority of shareholders for such a contest. Separately, another trigger for an election challenge would be pulled if 35 percent of shareholders withheld their votes in a board election.

The U.S. Chamber of Commerce blasted the approach as an attempt by unions and public employee pension funds to gain new leverage over corporate America. The Business Round- table placed ads in major newspapers signed by chief executives of 40 large corporations, warning that the proposal would erode board independence.

As opposition mounted, Donaldson began to show interest in a compromise dubbed "the cure," which essentially calls for giving boards a second chance to address shareholder unrest. For example, if 35 percent of shareholders withheld their vote for a director, the board would be allowed to offer a replacement nominee and avoid an election challenge.

But the GOP-backed attempt at compromise riled activists who viewed it as a retreat.

The Los Angeles Times is a Tribune Publishing newspaper.

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