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SEC change would favor shareholders

| Wednesday, July 16, 2003

WASHINGTON -- Shareholders would be able to nominate company directors under a proposal being considered by the Securities and Exchange Commission, but they first would have to demonstrate that the company had resisted legitimate requests by groups of investors.

The proposed change is not one of "democracy," but "to give some real power to people who have the right to express their view through a vote," SEC Chairman William Donaldson said Tuesday.

In a meeting with reporters, Donaldson framed the planned change as a significant step that extends the work of the sweeping corporate accountability legislation enacted last summer at the height of the business scandals that sapped investors' confidence.

Corporate America has seen a trend over the past decade toward "imperial" chief executives and boards of directors that often have acted as rubber stamps to executives' actions, Donaldson noted.

"The buck stops with the board," he said.

For shareholders to get their candidates for the board of directors officially nominated, they would have to meet certain conditions, such as already having faced company resistance when they brought up proposals for changes in corporate policy. In addition, the investors backing a candidate would have to hold a certain percentage of the company's stock, likely a figure between 3 percent and 10 percent.

And they may be limited to nominating a single candidate.

The idea is not so much to get shareholder-backed candidates on boards as to prod companies to become more responsive to investors, Donaldson indicated.

Ann Yerger, deputy director of the Council of Institutional Investors, called the move "a very positive step for investors." She suggested that pension funds and other large investors likely would only have to press through the corporate board changes in a few, unusual cases of unresponsive corporations.

Under current rules, shareholders are allowed to nominate candidates for director but they cannot put a nominee's name in the company's official ballot materials mailed to investors, known as the proxy. That makes it expensive and exceedingly difficult to mount a campaign for alternate candidates to those the company puts forth.

Advocates of greater access for shareholders say they now have no effective way to oust a miscreant director other than by withholding approval from an entire slate of candidates put forward by company executives.

The SEC will seek public comment on the proposal and plans to issue tentative rules as soon as August and September, likely putting the changes in effect in time for next year's springtime season of voting by company shareholders.

The action comes soon after the five-member SEC moved to force companies to get approval from shareholders before lavishing stock options on executives and directors, a change long sought by investor advocates pushing corporate reform.

Excessive pay, lucrative stock options and special deals for executives whose companies have failed and laid off employees have eroded investor confidence already shaken by the accounting scandals of the past year or so. Big state, union and professional pension funds have been pressing for changes to give shareholders more say in companies' decisions on executive pay and other matters.

"This is a positive step towards making boards of directors more accountable to long-term investors," AFL-CIO President John Sweeney said yesterday of the new SEC proposal. "The retirement savings of America's working families have been harmed by the failure of boards of directors to prevent wrongdoing at Enron, WorldCom and other scandal-plagued companies."

Individual investors also believe it's important for shareholders to have a greater voice. Of some 650 comment letters on the matter already received by the SEC, more than 400 came from average investors.

Business groups have opposed such a change, contending that it would create conflict among directors sitting as a board.

"While we are heartened by the fact that the SEC staff has taken a number of our concerns into consideration, we believe the devil will be in the details," said John Castellani, president of the Business Roundtable, a group representing CEOs of major corporations. "The test is whether we end up with better corporate governance."

The group supports the parts of the proposal that would require companies to disclose to shareholders how they choose candidates for their boards and related processes.

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