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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 congressmen."

The issue:  the election of corporate directors.

That sounds like a yawner, but it isn't.  Here's why.

The problem

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 your shares.

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 shareholders.

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 elected.

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 humiliated.

Some examples:  UnitedHealth Group Inc., Home Depot Inc. and KB Home.

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 indefinitely stalled.

The proposals

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 shareholders.

The groups have launched a website at 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 accountability.",1,7796461.column?coll=la-headlines-business