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PROXY ACCESS: THE STRUGGLE FOR SHAREHOLDER RIGHTS

"Last October, Securities and Exchange Commission Chairman William H. Donaldson enthusiastically said that his plan [to allow shareholders to occasionally nominate candidates for corporate boards of directors] would help to dethrone the "imperial CEO." Yet the SEC's modest proposal is dangerously close to being killed by the very royalty it would help to remove." -- Los Angeles Times, July 17, 2004

"We ought to be looking at three fundamental questions. ... number three, how do we identify those few but those very blatant people that have deceived the American people, have deceived the shareholders and have acted in an illegal way and get them the hell out of the business system and put them in jail?"
-- Chamber of Commerce President Tom Donahue, Hardball (MSNBC), 7/8/02

CEOs and their cronies at the Chamber and the Business Roundtable have worked hard to block a proposal before the SEC to open up the proxy nomination process so that shareholders can nominate their own candidates for the board.

In an attempt to fend off the proposal, the Business Roundtable released a survey in March which suggested that corporations have made substantial improvements in corporate governance (and by implication don't need to be forced to do anything more), pointing to the fact that nearly three out four companies surveyed (71%) have an independent chairman, lead director or presiding director, while 99% report that their boards are at least 60% independent.

Yet shareholder activists point out that there is very little independence among board candidates when they are hand-picked by top executives or the nominating committee of the existing board. (The majority of Enron's board, for example, was comprised of so-called "independent" directors.)

Today's shareholders are given just one slate of candidates -- nominated by sitting directors without competition. Thus, a candidate can be elected with just one vote. And while a proposal before the SEC would open up the board nomination process so that shareholders could nominate their own candidates, under the proposal they can only do so after at least 35 percent of the shareholders withhold their votes for management's slate, and not until the following year. (As a result of pressure from the Chamber of Commerce, the SEC is considering raising that threshold to 50 percent.)

Even if the rule passed, its effect would be limited. Shareholders would not be able to nominate their own candidates unless they own or represent at least 5 percent of voting shares, and the rule would not guarantee them access to subsequent proxy mailings by the company. The rule doesn't limit the board's ability to spend company (i.e. shareholders') money to defeat their candidate. And in the unlikely event that shareholders are able to surmount all of these obstacles, the new board members would still be in the minority, since the shareholders are allowed to nominate only one to three candidates, depending on the size of the board.

While the Chamber of Commerce and Business Roundtable claim that "special interest groups" supporting the proxy access rule (i.e. unions that have seen many of their members' retirement savings destroyed by greedy executives) are somehow using it to push some hidden agenda instead of the "broader corporate interest," investors should question a system of corporate governance where board members have stood by and done nothing while top executives have raided corporate coffers as if they were their own personal piggy banks.

The SEC has yet to issue a final determination on the proxy access rule.

To learn more about the proxy access rule:
The Corporate Library
AFL-CIO page on proxy access rule
SEC Staff report on proxy access rule
Comments by the Business Roundtable in opposition to the Proxy Access Rule
Prof. Lucien Bebchuk's response to the Business Roundtable

U.S. Chamber also resists other corporate governance reforms

The Chamber of Commerce has also protested a proposal by the Office of Federal Housing Enterprise Oversight (OFHEO) to separate the positions of Chairman of the Board and CEO and to require mandatory auditor rotation. In its comments, the Chamber stated that these proposals are not in the interest of shareholders and will not strengthen corporate governance. In a press release, the Chamber explained: "Although the proposed rules apply to only two companies regulated by OFHEO, Fannie Mae and Freddie Mac, the Chamber is concerned the rules may affect other, regulated companies." The Chamber's comments are available HERE.

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