SEC Report Card

North Carolina, New York, California and Others Issue Shareholder Progress Report: SEC Under Donaldson ‘Incomplete’ on 3 Crucial Corporate Reforms

As SEC Acts on One Key Matter, Top State Investment Officers Urge Further Reforms To Protect Shareholders and Enhance Corporate Democracy

Raleigh– As part of a continuing effort to broaden shareholder rights and enhance corporate democracy in the wake of widespread financial scandals, North Carolina State Treasurer Richard Moore and the chief investment officers of six other states today called upon Securities and Exchange Commission (SEC) Chairman William Donaldson to move quickly to complete reforms on issues crucial to the protection of shareholders before the start of next year’s proxy season.

North Carolina Treasurer Moore, California Treasurer Phil Angelides, Connecticut Treasurer Denise Nappier, Kentucky Treasurer Jonathan Miller, Maine Treasurer Dale McCormick, New York State Comptroller Alan Hevesi, and Oregon Treasurer Randall Edwards issued a “progress report” that gave the SEC three grades of “incomplete” for unfinished work or failure to act on rules to democratize “management-controlled” corporate elections; to halt brokers’ ability to stuff ballots for management; and to stop corporations from co-opting accounting firms with lucrative tax consulting contracts.

The release of the progress report comes as the SEC announced final rules on one matter significant to investors – granting shareholders the right to approve equity compensation packages. The progress report gives the SEC a grade of “complete” for today’s action.

Moore and the others acknowledged that Donaldson has been SEC chairman for a little more than 100 days. But they emphasized that it is important to put the chairman on notice that these shareholder concerns have languished for months or years, and that decisive action by Donaldson is imperative.

The following four areas are cited in the progress report:

  • Excessive executive pay packages have been the source of some of the most blatant abuses in the marketplace in the recent past. It had been nearly a year since the New York Stock Exchange and the NASDAQ submitted rules to allow shareholders the right to approve virtually all equity compensation plans. The SEC acted just today to make the rules final.
  • For a decade, shareholders have petitioned the SEC for new rules that strengthen their rights to fair corporate elections. In the absence of reforms, shareholders are still forced to wage costly proxy battles to nominate candidates for corporate boards, but management is allowed to campaign for its slate of candidates at company expense.
  • Under other longstanding rules, stock exchange members often have been allowed to vote shareholder proxies if the shareholder has provided no instruction. This practice has been cited by some as a system that allows brokers who have corporate business relationships to “stuff the ballots” for management, to the detriment of shareholders.

In January of this year, the SEC created a loophole when – in response to the requirements of the Sarbanes-Oxley Act of 2002 – it attempted to tighten rules for accountants who audit corporate books. The rules approved in January still allow corporate management to issue tax-consulting contracts to their auditors and to set up tax shelters for companies and then certify that they are lawful when they perform their audits. The Public Company Accounting Oversight Board has reopened the issue but, to date, accounting firms may still perform tax services for their corporate clients.

The state investment officers today were joined by, among others, Consumers Union and the Union of Needletrades, Industrial and Textile Employees (UNITE!), in endorsing the progress report.

Subject Grade Comment
SHAREHOLDER APPROVAL OF EXECUTIVE PAY Complete For too long, shareholders have had little or no control over executive compensation packages, leading to egregious abuses by corporate executives at the expense of employees and shareholders.

Almost eleven months ago, on August 1, 2002, the New York Stock Exchange and NASDAQ submitted rules to the SEC that would give shareholders the right to approve virtually all equity compensation plans, including stock options. The comment period on the proposed rules expired in November 2002. Today, nearly eight months later, the SEC finally has acted, adopting the rules – but only after allowing the most significant proxy season in history to pass without shareholders having a strong voice on one of the most critical corporate governance issues of our day.
SHAREHOLDERS’ RIGHTS TO FAIR ELECTIONS Incomplete Over the course of the last decade, shareholders have urged the SEC to improve corporate democracy by adopting new rules strengthening shareholders’ rights to fair elections. Currently, shareholders must launch costly proxy battles in order to nominate board candidates or force board consideration of an issue, while management recommends a proposal or slate of candidates and campaigns for it at company expense. Responding to shareholder pressure for more democratic corporate elections, the SEC will once again consider this issue and has asked its staff to provide recommendations by July 15, 2003, regarding reforms that would improve corporate democracy.
“DE-FACTO” BALLOT STUFFING FOR MANAGEMENT Incomplete Under longstanding rules, brokers have been allowed to vote shareholder proxies, in many circumstances, if the shareholder has provided no instruction. This has resulted in a “de-facto” system of ballot stuffing for management (by brokers who may have business relationships with corporate management) to the detriment of shareholders, especially on an issue of major importance – the election of directors – and other issues such as the ratification of auditors. Despite repeated requests by major shareholders, the SEC has failed to initiate reform of outdated rules that remain unfair to shareholders.
AUDIT CONFLICTS Incomplete The Sarbanes-Oxley Act of 2002 required the SEC to tighten rules for accountants who audit corporate books, but when it came time to act – in January 2003 – the SEC left a gaping loophole. Corporate management will still be able to co-opt their auditors with tax consulting contracts. Moreover, the SEC rules still allow auditors to set up tax shelters for companies, and then make a judgment that the shelter they have designed fits the rules. The Public Company Accounting Oversight Board has reopened the issue, but to date, accounting firms may still perform tax services for their corporate clients.