Investor groups are still fighting for input on board ballots

Last November's decision by the Securities and Exchange Commission to restrict shareholder access to proxies kicked off a new round of attacks by opponents of the rule who are more determined than ever to gain access to corporate ballots. In fact, activists contend they may gain more ground than if the SEC had voted the other way.

At issue is whether companies can keep director nominations by shareholders off the proxy ballot. Investor groups say they should have the right to put forth independent directors without mounting a costly proxy fight. They point out that this is the norm in nearly all other industrialized countries. Business groups argue such access would open the door to divisive boardroom free-for-alls. The three Republican SEC members agreed, outvoting the lone Democrat (who has announced plans to resign; the other Democratic seat hasn't been filled). In the process, the Commission rejected the other proposal it was considering, which would have allowed limited ballot access only for investors that met a high threshold.

In response, shareholder groups renewed a push for full access that's likely to wind up in the courts, where they stand a good chance of winning more than they would have gained under the second SEC proposal. Within days of the vote, the employees' pension plan of the American Federation of State, County & Municipal Employees (AFSCME) filed proposals asking Bear Stearns and JPMorgan Chase to amend their corporate bylaws to allow shareholders access to proxy statements.

The pension fund was joined in the Bear Stearns effort by the New Jersey Division of Investments and the North Carolina State Treasurer. North Carolina also filed for proxy access at JPMorgan Chase. Bear Stearns may be particularly vulnerable due to its heavy exposure to the subprime crisis, which may help sway the courts about the need for shareholders to have a direct voice in choosing directors. AFSCME later filed a similar proposal at E*Trade, while the California Public Employees' Retirement Systems filed one at Kellwood, a St. Louis-based apparel marketer.

Bear Stearns has tried to block the motion by citing the SEC vote, so AFSCME is threatening to go to court over the matter. That would bring the entire issue right back to where it started. In September 2006, AFSCME won a lawsuit on appeal against AIG, which had omitted (with SEC permission) a resolution seeking proxy access to nominate directors. In the decision, the federal Second Circuit chided the SEC for contravening a rule allowing such resolutions that the Commission established in 1976 and upheld for more than a dozen years. Starting in 1990, the court pointed out, the SEC changed course and started disallowing such resolutions—without explaining the change or seeking public input on it. The judges even admonished the SEC for refusing to admit in the Commission's amicus brief supporting AIG that it changed the interpretation of its 1976 rule.

The court held that AIG should not have excluded AFSCME's proposal because it did not relate to a specific election, but to "procedures for elections" generally. It also found that if the SEC disagreed with this interpretation of its rule, the Commission needed to circulate a notice of proposed rule-making setting forth its alternative interpretation, take public comments, and follow standard rule-making procedures.

Given this history, the court may not look kindly on the new blanket restriction on access the SEC has put in place. AFSCME was careful to pick two companies in the Second Circuit, which means the cases would go right back to the same judges if the Commission sides with management again and rebuffs its request.

Commission Chairman Christopher Cox has signaled that the door is still open on the issue. After ultimately voting for the no-access proposal, he said publicly that the measure was a holding pattern necessary to promote clarity and even vowed to revisit the subject this year. The court may take this as a sign that the SEC doesn't have a well-thought-out rationale for its reaffirmation of the 1990 rule change. Many shareholder activists perceive that the victory won by business groups in November was a temporary setback. To them, it's inevitable that the U.S. ultimately will follow most other industrialized countries and grant proxy access.