Proxy-Season Gridlock At The SEC

By not ruling on investor power in board elections, it's setting the stage for a fracas

In the 18 months Christopher Cox has led the Securities & Exchange Commission, he's made great strides toward unifying a fractured agency, racking up a string of unanimous votes on even polarizing issues such as executive pay disclosure. But now Cox's drive for consensus is slowing the agency's response to one of the most urgent issues in business: the growing power of shareholders in corporate elections.

In September a federal appeals court attacked an SEC policy that for years had effectively blocked investors from getting their candidates for the board of directors on the ballot. Cox promised swift action to create "one clear rule" to govern board elections. But the commission failed to take up the matter at its October meeting and punted again in December even as executives pleaded for guidance on the eve of proxy season. "The SEC has allowed this to fester, and it now is simply getting out of control," says Peter J. Wallison of the American Enterprise Institute, a free-market think tank in Washington. "It has left companies just hanging out there, completely without any defenses."

Activist shareholders are gleeful to have the upper hand. "This is the accountability mechanism shareholders have been searching for for at least 30 years," says Richard C. Ferlauto, director of pension policy at the American Federation of State, County & Municipal Employees. AFSCME had challenged the long-standing SEC rule in a 2005 lawsuit against insurer American International Group Inc. (AIG ), ultimately prevailing at the U.S. Court of Appeals for the Second Circuit.


Armed with the Second Circuit opinion, investors are pushing proxy proposals at Hewlett-Packard (HPQ ), Reliant Energy, and UnitedHealth Group (UNH ). All three sought the SEC's blessing to omit the proposals from their proxies. But in a Jan. 22 letter to HP, the SEC declined to take a side. AFSCME sued to ensure HP would include the proposal, which the company did.

HP's experience prompted Reliant to file its own lawsuit. On Feb. 5 the company asked the U.S. District Court in Houston to block an election proposal from Seneca Capital Investment Partnership. UnitedHealth, based in Minnetonka, Minn., hopes to use state law to exclude a similar resolution from its proxy.

Corporate lawyers blame the SEC for the chaos. "We were surprised by the SEC response to Hewlett-Packard," says Reliant attorney Michael P. Rogan, a partner at Skadden, Arps, Slate, Meagher & Flom. "We didn't expect to get to this point." Nor did business lobbyists, who are hammering the SEC to issue a new rule that will give business the means to fight back.

Business shouldn't count on a speedy fix or a return to the old days. As Cox works to build support among commissioners evenly split between Democrats and Republicans, he makes clear his intent to expand shareholder rights: "We have any number of special committees telling us that in order to be more competitive, the U.S. has to sharpen its edge," the SEC chief says. That means not only lightening the regulatory load "but also making sure that shareholder rights are thoroughly respected.

By Lorraine Woellert

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