The Securities and Exchange Commission on Wednesday made the correct decision on a controversial shareholder rights issue. Now the agency's chairman, Christopher Cox, will pay the price.
He will hear from public pension funds that he's anti-investor. Congressmen opposed to the action will sound off and perhaps call him to Capitol Hill to explain himself.
The dissenting commissioner and lone Democrat on the panel, Annette L. Nazareth, said she didn't see a way to vote with her three fellow commissioners Wednesday and still "claim to be supportive of shareholder rights in the longer term." The head of the AFL-CIO said Cox "caved in to political pressure to take away a fundamental right."
What exactly did Cox and his two Republican fellow commissioners do to incite the calumny? Simply codify what had been long-standing SEC practice until a court overturned it. They said, in essence, that companies don't have to allow votes on proposals to force companies to list the names of board candidates put forth by shareholders on official corporate voting materials.
If Cox is to be criticized at all, it is for the mixed signals he sent during the protracted debate on the so-called proxy access issue. It was the second time in recent history that the SEC took on this tortured debate. Under Cox's predecessor, William Donaldson, many words and proposals were devoted to the question of whether large shareholders should be allowed to nominate board candidates that the company would have to acknowledge on its proxies. In that round, the complex plan never came to a vote of the watchdog agency's commissioners.
Unfortunately, Cox's comments Wednesday will keep the issue alive, even after the brickbats finally stop. The chairman said he would have liked to do more for shareholders and said the commission would revisit the issue next year. He voted to bar access, he explained, to provide clarity for companies ahead of the proxies that will be sent out to start the 2008 annual meeting season. It would have been nice to finally close the door on this issue.
Though director-nomination rights are enjoyed by shareholders in countries other than the U.S., the measure never passed the basic test for new regulation: real need. More than that, proxy access would work against the basic idea that directors represent all shareholders and are interested only in the long-term, sustainable financial success of the enterprise to the benefit of all holders.
Under the proxy-access plan the SEC considered, only the biggest shareholders would have been able to nominate board candidates and list them on the proxy statement, creating a class division among shareholders. Those director candidates could well be beholden to the interests of the investors who nominated them, which could include social and political agendas. Companies are best served by directors solely interested in legal, sustainable financial success.
It also is instructive to look at what went on in the real world of corporate governance during the time the SEC was routinely allowing companies to disregard proposals on shareholder-nominated directors. Shareholders' rights have grown enormously.
Yes, there were accounting scandals during this time, and in many cases boards of directors were asleep at the switch as the problems arose. But the Sarbanes-Oxley Act those scandals ushered in strengthened and empowered boards generally and required that nominating committees be staffed by independent directors.
Meanwhile, a "majority" voting movement took hold. At increasing numbers of public U.S. companies, uncontested director elections are now real elections in the sense that a director must get more "yes" votes than "withholds" to continue to serve. More companies should adopt this practice.
Furthermore, activist investors showed that with reasonably small stakes, often bolstered by options rather than outright stock purchases, shareholders or groups of them could have real influence on corporate managements, often successfully pressing for big strategic changes and significant asset sales.
On top of all this, Chairman Cox pushed for electronic proxy distribution. This mitigates against the claimed underlying need for proxy access: expense. Shareholders already can nominate directors, but it costs money to distribute a competing slate to all shareholders, thus the enthusiasm for hitchhiking on the company proxy. But electronic proxies should dramatically cut the cost of competing.
Doing the right thing isn't always easy. Chairman Cox will find that out.
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Neal Lipschutz is senior vice president and managing editor of Dow Jones Newswires.
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