SEC limits investors' proxy power
Following a contentious hearing, the Securities and Exchange Commission adopted a rule that will make it more difficult for shareholders to nominate their own candidates to serve on the boards of companies.
By a 3-1 vote along party lines, the SEC reinforced its long-standing position that public firms can rebuff shareholders' attempts to get their own director candidates on proxy ballots. A federal appeals court decision last year upended the SEC's position, creating the possibility that shareholder activists could force their candidates onto proxy slates through litigation.
In a statement explaining Wednesday's vote, SEC Chairman Christopher Cox promised that he would eventually push for a new rule giving shareholders the proxy-access rights they sought. But because of the legal uncertainty generated by last year's court decision, Cox said, an affirmation of long-standing SEC policy was the best thing to do.
Annette Nazareth, the lone Democrat on the commission, declared that "today's amendments are an unfortunate step backward."
Nazareth also criticized the process by which the SEC came up with Wednesday's proposal, noting that the commission held three round-table discussions on it in May, with no mention of the problem of "uncertainty" based on the appeals court decision. She said that the issue was so controversial that it generated 34,000 comment letters, which the SEC says is a record. "The discussion of uncertainty ... appears to be a post ad-hoc rationalization of a path that was ill-conceived in the first place."
Shareholder advocates agreed. "The SEC should no longer be allowed to refer to itself as 'the investor's advocate,' says Nell Minow, editor at The Corporate Library. "The only thing more appalling than this obstruction of the rights of shareholders is the flimsiness of its supporting arguments."
"This is a sad day for shareowners," says Ann Yerger, executive director of the Council for Institutional Investors. "It makes no sense for the commission to do the wrong thing now but promise to try to do the right thing next year."
David Hirschmann, senior vice president of the U.S. Chamber of Commerce, praised the SEC's decision, saying it provided "certainty, so this issue isn't addressed company by company." Describing union pension funds as "special interests," Hirschmann said "anything that puts special interests' agendas ahead of investors' interests is a step back."
For SEC Chairman Cox, the decision to adopt the new rule is a watershed event. A former congressman, Cox has deftly navigated the turbulent waters separating the interests of the business community from those of the average investor during his tenure at the SEC. But with Wednesday's ruling, Cox appears to have come down on the side of big business.
Richard Ferlauto of the American Federation of State, County and Municipal Employees (AFSCME) said the SEC's decision wouldn't stand up to a legal challenge. It was AFSCME's attempt to force AIG to allow shareholders access to the company's proxy statement that was embraced by the federal appeals court last year. "This action will tar (Cox's) legacy as an anti-shareholder chairman and essentially now makes him a lame duck," he said.
Former SEC Commissioner Harvey Goldschmid, now a professor at Columbia Law School, described Wednesday's vote as a "tragic mistake in terms of the signal it sends."
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