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The Securities and Exchange Commission is expected this month to issue draft rules that would allow a majority of shareholders to make a proxy proposal criticizing a public company’s governance record and to seek investor approval to nominate their own board candidates. The draft rules, which will be open for comment for 30 to 60 days, could deliver another blow to corporate executives still struggling to cope with newly implemented accounting regulations in the Sarbanes-Oxley Act. SEC Chairman William Donaldson wants the new governance rules in effect by spring to coincide with the proxy filing season. Under the SEC proposal, obtaining the right to nominate a board member by proxy would be a two-step process. First, a majority of investors must approve a shareholder measure nominating a board candidate. If approved, that candidate would appear on the proxy ballot the following year. Only shareholders who own at least 3 percent to 5 percent of a company for a minimum of one year would qualify to nominate a candidate on the corporation’s ballot. Still, the proposed rule has many in Corporate America concerned. “People are going to get on the board with their own agenda, and that may not be in the interest of all investors,” said Robert Todd Lang, chairman of the American Bar Association Task Force on Shareholder Proposals. The changes are expected to give shareholders more influence in corporate proxy contests. Currently, dissatisfied investors wishing to challenge company management must resort to costly proxy fights, introducing their own director slates on separate proxy cards. Corporate advocates, including The Business Roundtable, a Washington, D.C., association of CEOs, are expected to challenge the so-called access rules immediately after they take effect. “Granting any level of access will get some legal challenges,” predicts Patrick McGurn, director of Rockville, Md.-based proxy advisory firm Institutional Shareholder Services. But shareholder activists such as McGurn said the new rules would ensure vigorous debate on the board, encouraging directors to represent the interest of investors. He also dismissed concerns that the proposed SEC rules will allow certain shareholders to hijack a company’s board for their own interests rather than investors as a whole. That is because a majority of shareholders would be required to elect a board member, McGurn said. Lang also contended that the SEC should hold off on the new regulations until proposed Nasdaq and New York Stock Exchange rules governing board independence are in force for at least a year. The SEC is expected to approve the new Nasdaq and NYSE rules in roughly two weeks. But McGurn said the stock exchange listing standards will not on their own make boards more accountable to shareholders. “You can have a board that is independent on paper but still refuses to listen to shareholders,” he noted. McGurn said that investors wishing to propose candidates on corporate proxies will likely be required to demonstrate that management and directors have not responded to shareholder resolutions in the past. And traditionally, that has been the norm. This year a majority of shareholders have approved 149 governance-related proposals at annual company meetings. Of these companies, however, only 12 complied with shareholder demands, McGurn said. “Shareholders will probably need to point to these unfulfilled resolutions in order to get access,” McGurn said. The draft rules will bar shareholders from exploiting the governance provisions from electing a board with the select purpose of forcing out corporate management and selling the company. But it won’t prohibit activist investors that succeed in electing a director to the board from launching a proxy contest to oust corporate leaders. “They can always run their own slate,” an SEC source sad. That’s likely to encourage activist shareholders to engage in proxy challenges and will help ensure that directors represent investor interests, said Gregory Taxin, chief executive of San Francisco-based proxy advisory firm Glass, Lewis & Co. LLC. “Creating a situation where more board members are elected that consider whether the company should be sold balances those directors that are tied to management and lean towards keeping the firm independent,” he said. Copyright �2003 TDD, LLC. All rights reserved.

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