Blocking Activists’ Trojan Horse

The Securities and Exchange Commission dealt a blow this week to a stealth bid by self-proclaimed “socially responsible investors” to gain control of corporate boards. It’s a small but necessary victory in the battle to protect the free-enterprise system.The SEC told Verizon, Qwest and Halliburton that no enforcement action would be taken against their impending refusal to accept proxy proposals from several institutional investors – including the American Federation of State, County and Municipal Employees and the Connecticut and New York state pension funds – to nominate rival candidates for open board seats.The controversy dates from May 2003 when the AFL-CIO, exploiting the Enron, WorldCom, and other recent corporate scandals, petitioned the SEC to permit minority shareholders to nominate directors for corporate boards.“Granting institutional shareholders the ability to [nominate directors] is a key response to both the broader corporate crisis and the specific longstanding problem of corporate boards ignoring investor concerns,” claimed the labor union.Then in October 2003, the SEC proposed to require that, under certain circumstances, companies include minority shareholders’ nominees in their proxy materials.By the time the public comment period ended in March 2004, the SEC had received more than 500 comments, mostly in favor of the proposal. But the core of that majority – including virtually all labor unions, a number of politicized state pension funds, and social and environmental funds – wasn’t surprising. It clearly exposed the rulemaking’s real purpose.As spotlighted in George Washington University professor Jarol B. Manheim’s 2004 book, “Biz-War and the Out-of-Power Elite: The Progressive-Left Attack on the Corporation,” the political left has been working to compensate for the political power it has lost since the 1980s by trying to gain sway over corporate decision-making in hopes of influencing American politics and public policy.The global warming controversy is an example of how this strategy works. While the Kyoto treaty is politically dead in America – both President Bush and the Senate rejected it – left-leaning environmental groups and sympathetic institutional investors are pressuring companies to reduce their greenhouse gas emissions to levels on par with the treaty, thereby implementing its provisions on a corporation-by-corporation basis.One obvious way for activists to pressure corporate managements is to seed corporate boards with likeminded directors. But while shareholders have the right to vote for directors, the process of nominating board candidates has traditionally been an internal corporate process without formal shareholder input.The activists, consequently, have been essentially locked out of the director nomination process. Enter the AFL-CIO petition, which appeared as the opening move in what will be the ultimate corporate takeover game.But the mere ability to nominate directors isn’t a sufficient end in itself since minority shareholders would still lack the votes to elect their candidates. So the activists are also pressing for a shareholder voting method called “cumulative voting,” a process designed to assure that minority shareholders can elect their candidates.“Cumulative voting should be used in the election of directors,” urged Ceres, a coalition of social activist groups and like-minded institutional investors representing $300 billion in assets, in its SEC comments.Since electing a director or two still isn’t sufficient to rule corporate boards, CalPERS wants 75 percent of a company’s board, and 100 percent of all its key committees to be comprised of directors who are independent – that is, directors without ties to corporate managements.Implicit in this position is the notion that ties to activists, of course, would not violate CalPERS’s standards of “independence.”Perhaps more disturbing is that most businesses – as evidenced by a majority of the 500 commentators favoring the SEC proposal – seem to be virtually oblivious to what the activists are up to.This week’s SEC decision isn’t the final word. SEC Chairman William H. Donaldson is committed to changing the proxy rules. So are the activists. No doubt corporate governance can be improved – but we ought to be wary of disguised initiatives that really amount to a facilitation of the Left’s unpopular political and social agenda.

Blocking Activists’ Trojan Horse

Blocking Activists’ Trojan Horse

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