WASHINGTON — Two influential corporate interest groups filed a federal lawsuit Wednesday attempting to block a provision of the recently passed overhaul of financial regulation that would give shareholders more say in the boardroom.
The U.S. Chamber of Commerce and the Business Roundtable filed an administrative challenge asking the Securities and Exchange Commission to halt its implementation of new rules announced on Aug. 25 for the selection of corporate boards. The pair also petitioned the U.S. Court of Appeals for the District of Columbia for immediate review.
The two powerful associations allege that the SEC has, arbitrarily and without regard to the cost to businesses, implemented new "proxy access" rules to allow dissident shareholders to run their own slates of candidates for a corporation's board of directors. The SEC responded Wednesday afternoon with a statement denying the allegation.
"We believe that the commission's proxy access rules are both lawful and in the best interests of the public and shareholders," said John Nester, an SEC spokesman.
Critics say that allowing a competitive slate to be put forth by a shareholder or group of shareholders owning more than 3 percent of a company's stock would give enormous new influence to labor unions, many of which have union-run pension funds.
Proponents, however, say that corporate boards are often chummy with management and often don't have the best interests of shareholders at heart. Allowing dissident slates would allow shareholders a greater say on executive pay and other areas of company policy.
Corporate boards are supposed to act as a check on management, but in recent years they've come under intense criticism for being inattentive. Boards drew scrutiny after the collapse of energy giant Enron Corp. in 2001. After the collapse of Wall Street financial firms in September 2008, questions about boardrooms rose anew.
Reporting by McClatchy Newspapers, for example, has since shown that board members at Moody's Investors Service didn't understand the firm's complex rating process for mortgage bonds, but continued to support the company's management.
The issue of passive corporate boards largely has been overshadowed by bigger debates over financial reform legislation, now called the Dodd-Frank Act after Sen. Christopher Dodd, D-Conn., and Rep. Barney Frank, D-Mass.
Debate affects many
The debate affects all publicly traded companies in the U.S., large or small. Under current practices, directors are nominated by management, and shareholders vote them up or down. It's highly unusual for proposed board members to be rejected. More than half of the roughly 10,000 U.S. corporations regulated by the SEC are incorporated in Delaware, which has mechanisms in its state laws for shareholders collectively to seek alternate slates of candidates.
The Dodd-Frank Act gave the SEC powers to make it easier for dissident shareholders who individually or collectively own 3 percent of a company's stock to run alternate candidates for the board.
The Chamber of Commerce and the Business Roundtable, which represents the top executives of major corporations, say that this gives union-run pension funds a way to disrupt the internal affairs of companies while seeking to organize workers.
The SEC has moved quickly, after a comment period, to take a step toward boardroom democratization. "Our rules will result in a greater number of nominees appearing on a proxy card. Shareholders will continue to have the opportunity to vote solely for management candidates, but our rules will also give shareholders the opportunity to vote for director candidates who otherwise might not have been included in company proxy materials," the SEC said in its 451-page rule issued after a 3-2 split vote on Aug. 25.
Debate affects many
The debate affects all publicly traded companies in the U.S., large or small. Under current practices, directors are nominated by management, and shareholders vote them up or down. It's highly unusual for proposed board members to be rejected. More than half of the roughly 10,000 U.S. corporations regulated by the SEC are incorporated in Delaware, which has mechanisms in its state laws for shareholders collectively to seek alternate slates of candidates.
The Dodd-Frank Act gave the SEC powers to make it easier for dissident shareholders who individually or collectively own 3 percent of a company's stock to run alternate candidates for the board.
The Chamber of Commerce and the Business Roundtable, which represents the top executives of major corporations, say that this gives union-run pension funds a way to disrupt the internal affairs of companies while seeking to organize workers.
McClatchy Newspapers correspondent David Lightman contributed.