Oct. 23–A proposal to give shareholders more say in nominating corporate directors is drawing a less-friendly reaction than might be expected from the investment community.<\/p>\n
The Securities and Exchange Commission recently proposed allowing large shareholders such as mutual funds to name their own board candidates on company ballots for the first time. The proposed rule change would apply only to large shareholders and only be triggered by a specific set of circumstances, such as dissenting votes by large numbers of stockowners.<\/p>\n
Response to the proposal, which won’t be acted on until after public commentary closes late this year, has been largely hostile.<\/p>\n
“They (the SEC) are getting hammered,” said Jim Cox, a securities law professor at Duke University. Several SEC commissioners offered less than ringing endorsements of the proposal even as they voted to put it out for public comment.<\/p>\n
Meanwhile, 10 state pension funds, among them the influential California Public Employees Retirement System, have panned the triggering requirements as “nearly insurmountable.” Companies, conversely, have fretted that contested elections might make corporate boards ineffective by bringing politics into the boardroom.<\/p>\n
“I have sort of mixed feelings about it,” said Karen Schnatterly, an assistant professor at the University of Minnesota’s Carlson School of Management. Schnatterly is uncomfortable with the notion that shareholders who own large blocks of stock should have certain rights not enjoyed by smaller investors. And she questions whether a big pension fund or other institutional investor will do any better picking potential board members and avoiding conflicts of interest in the boardroom.<\/p>\n
Cox believes the SEC should do something, but he’s not certain that the proposed rule is the right approach.<\/p>\n
“Quite frankly I would like to see pressure come from somewhere,” he said. Boards should be obligated to have members who represent the shareholders, such as representatives of pension funds that own the stock. However, doing so is tricky, he said.<\/p>\n
“The problem with that is getting into all kinds of really interesting insider-trading issues,” Cox said.<\/p>\n
The proposed SEC rule would make it easier for some shareholders to nominate directors. Currently, a company’s board of directors controls the nominations, which are sent to shareholders in the annual proxy statement. A dissenting shareholder can back alternate candidates, but must conduct the effort itself with a proxy fight — an expensive and difficult endeavor that hinges on the backing of large institutional shareholders that own big blocks of stock, as Schnatterly noted.<\/p>\n
Under the SEC proposal, shareholder groups that own at least 1 percent of a stock for at least one year could seek approval from a majority shareholders for allowing investor nominees. If that vote were approved, shareholders who own at least 5 percent of a company’s stock for at least two years could nominate candidates the next year.<\/p>\n
Investors also could nominate board candidates if shareholders withheld at least 35 percent of the vote from a company’s nominees. In that scenario, nominations would be allowed a year after support was withheld.<\/p>\n
The SEC proposal does have supporters, among them Lee Kopp, president of Edina-based Kopp Investment Advisors. Kopp believes the opportunity for shareholders to nominate directors could help clean up Wall Street’s ongoing problems such as mutual funds allowing hedge funds to trade after hours — an advantage not enjoyed by average investors.<\/p>\n
“Maybe allowing the public to place one of their representatives on the board of directors isn’t all bad,” Kopp said. “I kind of applaud it. Anything that will make (board members) a little more conscious about what is the right thing to do for the investor, for the shareholder.”<\/p>\n
Another fan of the idea is Vic Greenstein, a stockbroker who manages a local office for St. Louis brokerage Stifel, Nicolaus & Co. “On balance it would be positive. It would get rid of the fraternity, the club, if you will,” he said.<\/p>\n
Greenstein routinely attends annual meetings and makes it a point to approach executives and board members to get his point across. While he feels free to suggest board candidates, Greenstein believes more must be done to make directors responsive to shareholders. His suggestion: put the names of directors in the newspaper. Every story about a company should include the names of outside directors to remind shareholders who is running a company, especially since many investors never take the time to look up the names of board members.<\/p>\n
“It would just put them on record that if there’s anything even close to being decisions that probably aren’t in the long-term interest of the company it would expose them to the public,” Greenstein said. “It truly would be a very easy way to put the outside board on notice that just getting a copy of the meeting that’s coming up, asking a few questions getting their lunch, and getting their paycheck — those days have to be over.”<\/p>\n
—–<\/p>\n
To see more of the Saint Paul Pioneer Press, or to subscribe to the newspaper, go to http:\/\/www.twincities.com\/mld\/pioneerpress.<\/p>\n
(c) 2003, Saint Paul Pioneer Press, Minn. Distributed by Knight Ridder\/Tribune Business News.<\/p>\n","protected":false},"excerpt":{"rendered":"
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