SIDELINING SHAREHOLDERS

A recent Securities and Exchange Commission vote to weaken shareholder rights should, as the board’s chairman has promised, soon be reconsidered to ensure that stockholders retain a needed voice.

Shareholders are the owners of a corporation. Ideally they elect a board of directors to set policy and appoint managers to carry it out as they run the company.

But as the mortgage crisis deepens and many of the leading banks and other financial corporations are losing billions of dollars, some shareholders feel betrayed by ignorance, inattention and greed at the top. They complain that managers are getting hefty salaries and bonuses, often regardless of performance, and thus have felt free to take big risks in hopes of big profits. But big risks also can mean big losses, as happened when the housing bubble burst and mortgage defaults and foreclosures surged.

Theoretically, shareholders can replace directors who were asleep at the switch and let managers lead their corporations over the cliff. That’s the direction things were going until the Securities and Exchange Commission’s Republican majority ruled on Nov. 28 that investors could not nominate their own board candidates.

A dispute had been building over whether shareholders should be able to influence board elections. Companies used to simply present slates of directors and permit the shareholders to vote yes or no or abstain, unless they mounted expensive proxy campaigns. Then, in September 2006, a federal appeals court in New York decided that shareholders should be able to propose changes in corporate bylaws that would permit the nomination of rival slates. Instead of adopting rules to give shareholders that right, the SEC set out to circumvent the court decision.

In a 3-1 vote, the SEC now has followed the bidding of the Business Roundtable and the U.S. Chamber of Commerce and ruled specifically that a shareholder may not propose a nomination for membership in a corporation’s board of directors. Chairman Christopher Cox insisted that the vote was merely a temporary measure and that the commission would reopen the discussion in 2008 “to better vindicate the fundamental state law rights of shareholders to elect directors.” Those were hollow words, since he voted just the opposite.

The New York Times’ Gretchen Morgenson discussed the issue in a Dec. 2 article headlined, “SEC Sends Investors to the Children’s Table.” She quoted former SEC Chairman Arthur Levitt as saying: “It’s a sad day when the SEC, the investor’s advocate, chooses to gag the voices of those they are charged to protect. Not only do shareholders deserve a say in who runs the companies they own, but free and fair markets depend on this oversight.”

This watchdog agency is overdue for a shakeup. One man, no vote is no way to run a democratic system.