New SEC rules will give investors clout
with companies that ignore them
Time Warner Inc. (AOL ) dodged a bullet earlier
this year when a labor pension fund sought to inject a jolt of democracy into
board elections. Angered by the media giant's accounting scandals and troubled
2001 merger with America Online, the fund submitted a shareholder resolution to
let investors nominate directors. Management blew it off, citing Securities
& Exchange Commission rules that let companies control board
contests.
Not for much longer. By next year's proxy season, Time Warner
-- and a host of other targets of activists, from Lockheed Martin (LMT ) to Maytag (MYG ) -- will -- will face new
SEC rules that make it easier for shareholders to get their candidates on the
official ballot. "There should be some measure of shareholder participation in
the selection if there is evidence that the wishes of a large number of
shareholders are being ignored," SEC Chairman William H. Donaldson told senators
on Sept. 30. The new rules, expected to be approved and put out for comment on
Oct. 8, are potentially some of the most far-reaching post-Enron reforms. Says
Richard H. Koppes, a corporate governance lawyer at Jones Day in Sacramento:
"This goes to the heart of corporate power."
Challenges to official
director slates will likely be rare, but the mere threat of them could weigh
heavily on management decisions. Opening access to the proxy will boost the
clout of institutional investors, put teeth in shareholder resolutions, and
shake up sleepy boards. First casualties: poison pills and other takeover
defenses that investors hate because they depress stock
prices.
TRIGGER TIME. Corporate America is fiercely opposed to
opening up the proxy, so the SEC is treading carefully. Under its plan,
contested elections are likely to be approved only at the most unresponsive
companies. The agency envisions a two-step process, requiring a trigger that
shows management is ignoring shareholder wishes before activists can nominate
their own candidates. A vote to allow outside nominees or a big vote against a
director nominated by management would be enough. The SEC may also allow
elections at companies that ignore shareholder proposals backed by majorities,
votes that are merely advisory now.
Those requirements could trip up many
corporate icons. Lockheed Martin Corp., for example, kept former Enron director
Frank Savage even after an impressive 28% of shareholders voted to boot him off
the board. Boeing Co. (BA )
has agreed to repeal only one of three antitakeover measures that shareholders
have twice voted to dump. Overall, fewer than a dozen of the record 155
governance resolutions from investors passed this year have been adopted by
managements, according to the Investor Responsibility Research
Center.
Already, some companies are responding to the heat. Alcoa (AA ), Tyco International (TYC ), and Hewlett-Packard (HPQ ) made concessions on
golden parachutes after shareholders voted to curb CEO pay. Says Carol Bowie,
IRRC's director of governance research: "Ignoring shareholder votes isn't a
viable option anymore." Nor is a nonchalant attitude toward selecting directors.
The plan could prod companies to be more careful about whom they
pick.
CEOs fear the changes will put them at the mercy of investors --
and could force them to adopt policies they don't believe are in the company's
best interests. "No good director wants to run in a contested election. You
would do everything to avoid it," says Henry A. "Hank" McKinnell Jr., chairman
and CEO of Pfizer Inc. (PFE
) Studies show that poison pills and staggered boards result in higher takeover
offers, says a top Maytag official, explaining why its board hasn't complied
with shareholder votes to ditch such measures.
Business will lobby hard
for the SEC to limit shareholders' ability to nominate candidates. But labor and
public pension funds, on a roll after helping to topple New York Stock Exchange
Chairman Richard A. Grasso, will be agitating just as vigorously for easier
access. That leaves the SEC walking a fine line between empowering investors and
alienating business. Shareholders will still have to clear hurdles to get their
candidates on the ballot -- but they won't be running into brick walls.
