Donaldson's Balancing Act
At the World Economic Forum in January in the Swiss resort of Davos, Securities & Exchange Commission Chairman William H. Donaldson took a break from hobnobbing to moderate a panel on leadership. He listened intently as New York Stock Exchange CEO John A. Thain, Citicorp (C ) CEO Charles Prince, and Home Depot Inc. (HD ) Chairman and CEO Robert L. Nardelli gave pointers. Then the SEC chief offered his own 10 principles of effective leadership. When he finished, Donaldson was startled to find corporate moguls crowding around, pestering him for copies and demanding to know when he would write a book based on his ideas.
Publishers, put those contracts away. Donaldson plans to keep practicing what he preaches at the SEC's Washington headquarters for at least another year. And the 73-year-old Wall Streeter is going to need all the leadership savvy he can muster. Already under heavy fire from Corporate America and some Republicans, Donaldson is walking a fine line. He isn't abandoning his activist agenda so much as balancing his pursuit of further governance and market reforms with some business-friendly flexibility and regulatory streamlining.
But Donaldson will get in Corporate America's face with a new push to make all forms of executive compensation more transparent, so shareholders can spot when pay outpaces performance. He remains a zealous enforcer. And he still wants to give shareholders more say in board elections. But on that and other issues, he's taking a softer approach that's less likely to rile the boardroom set. And his agenda for 2005 is heavy on items to modernize markets and make existing rules more efficient and effective -- a classic Republican deregulatory course that should curry favor with business.
It's a mix that has investor advocates worried. "'Streamlining regulation' is often Washington-speak for gutting it," says Barbara Roper, president of the Consumer Federation of America. For now they're trusting that Donaldson won't backslide, based on his track record as a crusader. In his first two years in office, he set a blistering pace as he forced the New York Stock Exchange to overhaul its governance, cleaned up the mutual-fund mess, and threw the book at fraudsters.
The SEC chief insists the commission is not retrenching. Consider his most recent concession to business, an offer to rethink SEC rules that put teeth in legislation forcing companies to have stringent internal financial controls. Donaldson contends that the SEC always intended to review how the rule worked in practice, and that changes, if any, will be modest. "There would be no diminishment at all in shareholder protection," he told BusinessWeek. "We're not going to mess with the principles or ask Congress to change" the Sarbanes-Oxley law.
Donaldson also vows to bounce back from the SEC's failed attempt to give institutional investors more clout in board elections. "This is not an attempt on my part to push it under the rug," says Donaldson. "I consider it something we ought to be doing, and I'm trying to mobilize" to get it done. As he tries to craft a compromise, Donaldson hopes to prod CEOs and legal experts to explore amending state law to require directors to be elected by a majority rather than a plurality of votes cast.
Corporate America will find that hard to swallow. Nor will it take kindly to Donaldson's next quest, to force companies to come clean about all forms of executive pay and incentives, including supplemental retirement packages, perks, and other forms of stealth compensation. Donaldson also wants directors on compensation committees to explain the criteria they use to reward execs. Too many companies, he believes, lavish fat pay packages and perks on their CEOs regardless of performance. Pay experts point to Hewlett-Packard Co.'s (HPQ ) parting kisses to ousted CEO Carleton S. Fiorina -- a $1.5 million bonus for 2004, a poor year for the company, and a $21 million severance package.
Wall Street, too, is still in the SEC's sights, as Donaldson works to complete a raft of post-Enron reforms. Thorny technical issues have held up approval of new rules aimed at preventing abusive trading in mutual funds. Similar concerns have stymied proposals to curb the use of brokerage fee rebates to pay for products and services unrelated to stock research.
As he pushes more reforms, Donaldson risks creating more friction with business and his fellow Republicans, from the SEC to Congress and the White House. The agency is already battling court challenges to its rules on hedge funds and mutual funds. GOP mutterings about the activist SEC forced President George W. Bush publicly to defend his family's longtime friend -- even as Bush reiterated the need for "balance" in regulation.
Donaldson is doing his own balancing act. The SEC is pushing ahead with a plan to make it easier for corporations to register and sell stock, essentially eliminating the "quiet period" ahead of public offerings and making it easier to raise capital. The agency is working to harmonize international accounting standards and to reduce the regulatory burden on small companies. "It represents a return to the classic agenda that nearly every Republican SEC chairman has pursued," says Georgetown University law professor Donald C. Langevoort.
Donaldson's promise to review the internal control rule -- the most onerous and costly provision of Sarbanes-Oxley -- is also boosting his standing. "This will go a long way to buying Donaldson some peace" with the business community, says John Endean, president of the American Business Conference, an association of midsize growth companies. That goodwill will vanish, though, if the changes are puny. Warns one business lobbyist: "Donaldson's setting himself up for big expectations."
Raising expectations can be risky. An SEC staff plan to revamp the way stocks are traded lifted rival markets' hopes that the NYSE's barriers to competition would fall. The proposal did prod the exchange to hatch plans to expand its own e-trading. But the SEC has repeatedly revised its proposal, and Donaldson is reluctant to push the Big Board too hard. "Wisdom here would take changes just so far to avoid the destabilizing danger of fragmented trading," he says.
At issue: A rule that requires brokers to get the best price for a stock. One staff approach would put all electronically displayed orders from every market in one queue to be executed in order, from best price to worst. Donaldson is leery of that. He would require brokers just to look at the best price in each market in deciding where to route orders. Many NYSE rivals and the two other Republicans on the five-member commission want to scrap the best-price rule altogether, arguing that investors should be able to choose where they want to trade.
New market architecture is just one thorny area where Donaldson will need to find compromises in what promises to be his most difficult year yet at the SEC. Those Davos leadership pointers may come in handy.
By Amy Borrus, with Mike McNamee, in Washington