Fight over boards on again
The SEC is looking into how shareholders can have a greater say
in choosing directors.
By Kathy M. Kristof
Los Angeles Times
Sunday, September 23, 2007
A coalition of investor groups wants to mobilize shareholders to
upend proposals that could damage their rights.
"This is a critical moment," said Daniel Pedrotty, director of
the office of investment at the AFL-CIO, which has become an
activist investor on behalf of the union's pension plan. "Now
is the time that people really need to weigh in, not only with
the Securities and Exchange Commission but with their
The issue: the election of corporate directors.
That sounds like a yawner, but it isn't. Here's why.
Americans have poured $11 trillion into stocks over the last
decade, largely through their retirement plans and mutual
funds. That makes them owners who share in the assets and
earnings of publicly traded corporations.
Owning something normally gives you rights regarding it. But
with stock ownership, those rights are limited. As an owner,
you share in the profits and losses of a company through
dividends and through the rise or fall in the market value of
But a shareholder doesn't have the right to interfere in a
company's day-to-day operations. If you think the company
should have a better website, friendlier tellers or trendier
merchandise, you have no more right than the person on the
street to tell managers your thoughts.
That's a relief to most shareholders, who are busy managing
their own lives and don't want to take on the responsibility of
second-guessing the managers of the firms they've invested in.
In theory, shareholders elect corporate directors to represent
their interests. The directors -- mostly chief executives of
other companies -- oversee the managers, making sure they take
the company in the right direction and don't fritter away its
assets. These directors are given access to privy company
information and are paid hundreds of thousands of dollars
annually by the company, thanks to the capital provided by
But that system of oversight, some savvy shareholders complain,
is broken. One reason is that corporate directors are elected
Soviet-style: Managers get to handpick the nominees, and only
one person is submitted for each open slot. Unless
deep-pocketed investors spend the money to get their own
candidates on the ballot by launching an expensive proxy battle,
nominees face no opposition. Shareholders can vote for
management's choices or "withhold" their votes. As long as
directors get one vote -- even if it's their own -- they're
That makes it virtually impossible to remove directors who are
either too lazy or too beholden to managers to do their job.
When such directors dominate a board, there's little restraint
on a manager run amok.
It's worth noting that managers rarely run amok. Although
measuring sticks in this area are hard to find, one indication
is the number of companies that receive shareholder resolutions
calling on the company to do something differently.
Such resolutions are submitted at fewer than 20% of American
corporations, said Tim Smith, senior vice president of Walden
Asset Management in Boston and chairman of the Social Investment
Forum, which aims to promotes socially responsible investing.
The companies that get lots of proposals often are those where
managers have been sanctioned or investigated or publicly
Some examples: UnitedHealth Group Inc., Home Depot Inc. and KB
What some institutional shareholders have asked for is the right
in egregious cases to submit their own director candidate and
have the company include that candidate on the ballot sent to
all shareholders for election.
The Securities and Exchange Commission floated just such a
proposal about a decade ago. But with opposition from companies
claiming that giving shareholders rights would "politicize"
their election process, that agency action on the issue has been
In July, SEC Chairman Christopher Cox took an unusual step to
restart the debate. He voted to pass two mutually exclusive
proposals: One would set up a process to change corporate
bylaws to allow shareholders to nominate directors. The other
would foreclose entirely the possibility of such nominations
outside of full-scale proxy battles.
The problem is that even the proposal that's supposedly
shareholder friendly sets up such a high hurdle that it's
virtually unworkable, said Pedrotty of the AFL-CIO.
Specifically, only shareholders holding 5% of a company's common
stock for a year can submit this type of proposal. At a large
company, that would take billions of invested capital, he noted.
What you can do
The Social Investment Forum and the Interfaith Center on
Corporate Responsibility, a coalition of faith-based
institutional investors, are asking individual shareholders to
bury the SEC in comments. What they want, for now, is for the
SEC to dump both proposals, which they see as hostile to
The groups have launched a website at
www.saveshareholderrights.org to make it easy to lobby the
SEC before the Oct. 2 deadline. There, you can click on a link
to learn more about the issues or simply pull up a form letter
that you can sign and send electronically.
"The real owners of America's companies should be able to help
nominate corporate board members," the suggested message says.
"This is a process that could use more openness and