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SEC Reforms: Big Biz Says Enough Already

Ever since Enron Corp. imploded in scandal, Corporate America has been in a defensive crouch. But even with Enron Chief Financial Officer Andrew Fastow's plea bargain and the ongoing trials of former Tyco International (TYC) Chief Executive Dennis Kozlowski and lifestyle guru Martha Stewart, CEOs are now coming out of their foxholes to fight back a fresh wave of reform. They're joining battle against a Securities & Exchange Commission plan to open up the elections of corporate directors. The new rule, which SEC Chairman William H. Donaldson has championed, would make it easier for long-term shareholders to get candidates on the proxy ballots.

What has the corner-office crowd steamed? After two years of sweeping reforms ushered in by the 2002 Sarbanes-Oxley Act and last year's overhaul of New York Stock Exchange and NASDAQ listing standards, CEOs argue that it's time to give business a break. "The question is whether all the rules that have been implemented are enough" to ensure that boards respond to shareholders, says Steve Odland, CEO of car-parts retailer AutoZone and chair of the Business Roundtable's corporate governance task force. Execs warn that opening the boardroom to shareholder nominees could distract managers, divide directors, and let special-interest investors hijack elections.

The Roundtable, a group of 150 big-company CEOs, is spearheading a counterattack and hinting that it may sue to stop the rule. That's no idle threat: A court challenge from the group beat back another SEC voting-rights measure in 1990. Roundtable members, including the CEOs of Abbott Laboratories (ABT) and 3M (MMM), have fired off comment letters and written op-eds opposing the proxy plan. And CEOs will be vocal when the SEC convenes a forum on the proposal in early March.

The suits have also enlisted free-market conservative groups, including GOP activist Grover Norquist's Americans for Tax Reform. "People are scared to stand up to anything labeled 'good corporate governance,' even if it isn't," says Dan Clifton, executive director of the American Shareholders Assn., an Americans for Tax Reform offshoot funded partly by trade associations. "It's time to stand up, or we'll just get rolled."

Bring It On

Such concerns aren't likely to stay the SEC's hand. Three of five commissioners appear to support the rule. But the Roundtable could argue in court that the proposal crosses the line between proxy disclosure, which the agency may regulate, and proxy substance, which Congress left to the states.

Bring on the case, say some SEC officials. "All this does is set up a process for the election of directors, which I believe is clearly within the SEC's authority," says Commissioner Harvey J. Goldschmid.

Even as companies lambaste the proposed rule, however, they are quietly but rapidly dumping poison-pill takeover defenses, fat CEO severance deals, and other investor targets. Clearly, Corporate America isn't sure if it's safe, even in the face of a roaring stock market, to ignore shareholders' concerns. With its backlash against shareholder democracy, the Roundtable may soon learn whether investors are still out for blood -- or ready to forgive and move on. Reform of class actions died last year when Senator Mary L. Landrieu (D-La.) balked at the last minute. But weeks of targeted arm-twisting seem to have paid off. Corporate lobbyists have persuaded three Democratic senators -- Chris Dodd (Conn.), Charles Schumer (N.Y.), and Landrieu -- to back an amended bill. That gives the measure, which would make it easier for defendants to move cases from state to federal courts, a filibuster-proof margin for a late-January Senate vote. Federal Communications Commission Chairman Michael K. Powell's push to leave his deregulatory mark could land him on the FBI's "Most Wanted Pol" list. Powell is facing an all-out fight from the FBI, which is demanding FCC rules to force Web phone companies to cooperate with wiretaps. Net phone carriers say they'll play ball with the G-men -- but don't want FCC rules. For two years, U.S. regulators have taken their lumps from European counterparts over Corporate America's scandals. Now, they're seeing a change in attitude as l'affaires Ahold and Parmalat uncover gaping holes in the Continent's audits and enforcement. Top Securities & Exchange Commission officials say Euros are backing down from their demand for "mutual recognition" -- admitting stocks regulated under European rules into U.S. markets -- and moving toward tougher rules like those in 2002's Sarbanes-Oxley Act.

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