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At The SEC, The Agony Of Compromise


It's becoming a long, hot Washington summer for Securities & Exchange Commission Chairman William H. Donaldson. He's laboring to produce one of the most important expansions of shareholder democracy since the 1940s, but no one is happy. Corporate chieftains are up in arms. The White House wants the issue to go away until after the Nov. 2 election; with a close race, it's no time to tick off key supporters. Shareholder activists are demanding more than they're likely to get. And the five-member commission is split at least three ways. Vows Donaldson, "We're going to work on it, but we won't ram anything through until there's meaningful consensus."

Any major change in corporate governance is bound to raise hackles. The fight is over whether to allow shareholders to nominate directors to corporate boards and have them listed on the annual proxy ballot. But figuring out how to do so with at least the grudging acceptance of key players has been tying the SEC in knots for months. Now, BusinessWeek has learned, agency officials are quietly exploring a compromise that would encourage boards to agree with large investors on a new director if 35% of shareholders -- or 50%, excluding shares held in broker accounts -- withhold their votes for the company's nominee. "The key is to make sure a majority of shareholders gets a fair shake," says Commissioner Harvey J. Goldschmid, who has championed giving shareholders a bigger voice in nominating directors.

Proponents of the new rule would like to see it adopted in time for next spring's proxy season. Potential targets abound. This year, shareholders have withheld at least 35% of their votes from more than 25 directors up for election, according to a preliminary count at 115 companies by Automatic Data Processing Inc. (ADP) For example, 45% of Walt Disney Co. (DIS) shareholders withheld their votes from Chief Executive Michael D. Eisner and more than 50% of Federated Department Stores (FD) shareholders gave four directors thumbs-downs.

But a deal may prove elusive. The commission's two Democrats, Goldschmid and Roel C. Campos, back the original proposal for shareholder access to the proxy ballot that the SEC put out for comment last October. It would let big investors put their own candidate on the ballot if 35% of shareholders withheld their votes for a company-nominated director the year before. Donaldson welcomed it warmly at the time, but insiders say he and another Republican commissioner, Cynthia A. Glassman, now lean toward a more limited rule. Paul S. Atkins, the SEC's third Republican, says he has concerns about the measure.

"POWERFUL SIGNAL"

Now, the tight Presidential race could make it tough for any compromise until after the election. Business frets that the measure would let labor and other groups use board elections to push their own agendas. So the White House wants to avoid giving business any excuse to sit on its hands during the campaign. SEC staffers say politics plays no role in the chairman's policy decisions.

Donaldson also doesn't relish another divided vote by the commission on a high-profile issue. While the commissioners have been unanimous in most of their votes, they have split 3-2 over two of his key priorities, regulating hedge funds and requiring mutual-fund chairmen to be independent of the fund-management company. In both cases, the SEC chief sided with the two Democrats, a fact that grates on some Republicans. Says one SEC insider: "He'd like to avoid another 3-2 vote, particularly on this issue."

After the election, shareholder democracy won't be such a political powder keg. If President Bush is reelected, Goldschmid and Campos might drop their objections to a more modest variation of the earlier proposal that Donaldson and Glassman are said to favor. This version, which has tepid support at best from business, would give shareholders the right to nominate a candidate after a majority no-vote for the company's nominee, but the board could preempt that by choosing a new director on its own.

If Senator John F. Kerry wins the White House, Donaldson might have to edge closer to the two Democrats' position to get a rule adopted before stepping down. Goldschmid and Campos would have no incentive to budge: Kerry has publicly backed the drive to give shareholders a better shot at nominating directors.

Truth be told, anything could happen after the election. That's why some investor advocates think that getting the more limited approach approved quickly is better than risking the possibility of the SEC shelving the idea altogether after the election if a compromise can't be found. "If there's a large withheld vote and the company arranges for that director to step down, it sends a powerful signal to other companies to pay attention to whom they put on their boards," says Sarah Teslik, executive director of the Council of Institutional Investors.

But labor and other institutional investors are wary of making too many concessions. "If there's going to be an access rule, it should grant access," says Peter C. Clapman, senior vice-president at TIAA-CREF.

Despite such competing pressures, Donaldson's resolve to forge a deal shows no sign of waning. After all, he got the ball rolling a year ago when he directed SEC staffers to find a way to open up director elections at companies where boards have long ignored investors. But it may be hard for the chairman to keep his cool this summer.

By Amy Borrus in Washington


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