SEC Looking at Shareholder Proxy Rights

At issue: should shareholders have a greater say about who sits on corporate boards? Some say too much democracy a bad thing. Plus: More cash, fewer options possible for Dell and Intel, while DoL offers some advice on Sarbox/ERISA conflict.

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The Securities and Exchange Commission is considering a proposal that would make it easier for shareholders to elect their own representatives to boards of directors.

The SEC accepted comments through Friday on whether to require companies to include on proxy ballots (on their dime, no less) the names of director candidates nominated by shareholders.

“It’s time to look and see if there isn’t some way to satisfy the desire of shareholders to have responsible representation and not just to have to plead for the company to look at it, and at the same time would not allow someone or other to sneak into the tent and gain control of the company,” SEC chairman William Donaldson recently told the Washington Post.

But Donaldson also acknowledged that shareholder representation on boards is “a very sensitive issue.”

Indeed, chief executive officers aren’t exactly lining up to support the proposal. Many fear a potential too-many-chefs scenario, securities lawyer Howard Schiffman told the Post.

And when it comes to running a company, there could be such a thing as too much democracy. “The problem is that there could be so much democracy on the board that the board becomes another alternative management,” Schiffman told the newspaper. “There can’t be two CEOs. At some point you have to have a CEO who can make decisions.”

Executives prefer a happy medium, Schiffman told the Post—”something between a board that is totally passive and one that is an alternative government,” he said.

And then there’s the issue of board makeup, which executives carefully manage.

Managers strive for board diversity, including specialists in different fields and a balance of women and minorities, according to the Post. Challenges by shareholder groups could disturb such a mix and also lead to the election of directors with limited agendas, executives told the newspaper.

Tech Companies: More Cash, Fewer Options

Intel Corp. and Dell Computer Corp. are considering paying workers with more cash after being criticized for handing out more than 500 million shares of stock options during the second half of the 1990s, according to a Bloomberg report.

Management at chipmaker Intel said in an SEC filing that it may increase the amount of cash it pays workers and switch to stock grants linked to performance. Dell CFO James Schneider told Bloomberg that the company will cut by half the number of stock options issued this year.

Companies are reevaluating their use of stock options as it gets increasingly likely that expensing options will become mandatory. Investors have criticized the role of options in inflating results. The earnings Intel and Dell reported during the past year would have been more than 30 percent lower had options been expensed.

Although companies like Dell and Intel have indicated that they pretty much know expensing will become rule, they apparently plan to go down fighting. Both companies are members of the International Employee Stock Options Coalition, a lobbying group that supports bills to delay options expensing.

Last month Intel CFO Andy Bryant went as far as telling a Senate roundtable that requiring companies to expense options boils down to “asking me to commit perjury.” CFOs would be asked to certify financial results distorted by inaccurate estimates of option costs, he said.

Even without the expensing requirement, companies are looking at new ways to reward workers because many options awarded in the 1990s can’t be exercised profitably since U.S. share prices dropped in the past three years.

Management at semiconductor maker LSI Logic Corp. said it’s asking shareholders to approve a plan allowing it to change compensation “if and when option expensing is required,” according to Bloomberg.

For its part, Dell announced recently that it will award executives cash bonuses up to $6.9 million each in fiscal 2007, assuming performance goals are met, on the premise that the market for labor isn’t as competitive as it was in the late 1990s.

One company that’s apparently playing wait-and-see on expensing options is Microsoft, according to Bloomberg. Senior management at the software maker wants to continue awarding stock to employees and hasn’t decided what it will do if expensing is required, CFO John Connors told the news service: “An equity-based program that is broad-based for all employees makes a great deal of sense. You’ll probably see companies in the tech sector continue to have an option program that’s important.”

Labor Department Offers Assistance

In a recent Field Assistance Bulletin, the Department of Labor (DoL) offered a resolution to a potential conflict between the Sarbanes-Oxley Act of 2002 and the Employee Retirement Income Security Act of 1974 (ERISA). Sarbanes-Oxley generally prohibits a publicly traded company from directly or indirectly making personal loans to or for any of its directors or executive officers (or their equivalent). On the other hand, under ERISA any 401(k) plan loans must be made available to all participants and beneficiaries of the plan on a reasonably equivalent basis.

The SEC has not yet clarified whether the Sarbanes-Oxley prohibition applies to 401(k) plan loans to directors and executives. Meanwhile, corporate executives concerned about the conflict have been considering changing their companies’ 401(k) plans to reflect the rule. But then they would violate the DoL’s rule regarding availability of plan loans. You see the dilemma.

No worries, says the DoL. In FAB 2003-1, the department says it’s willing to make an exception. Plan fiduciaries of public companies may deny 401(k) loans to officers and directors without violating ERISA.

Short Takes

  • The Honolulu Star-Bulletin reports that the U.S. Defense Department has ticked off the Aloha State’s Tourism Authority. According to the paper, the DoD has bailed on the Hawaii Convention Center, which was set to host a meeting of the American Society of Military Comptrollers in 2005. Why the reversal? It’s too expensive and too far, according to Pentagon CFO Dov S. Zakheim. In a May 23 letter, he told the tourism agency that Defense should have its planned training event in the Washington, D.C., area instead. (“Should have”—no word on why it didn’t, however.) The tourism authority is concerned that the decision sends an official message that Hawaii is too expensive as a meeting place, an image tourism officials in that state have been battling.
  • It seems casino execs in southern Nevada are cleaning up at the tables. According to the Las Vegas Sun, the gaming industry dominated a list of top-earning Vegas-area executives. Glenn Schaeffer, CFO of Mandalay Resort Group, came in at number two with $17.6 million in total compensation. The only executive to earn more was Harrah’s Entertainment Corp. chief Gary Loveman.
  • The American Bar Association has a new finance chief. Janet Gibbs started her new position last week as CFO and associate executive director of the ABA’s financial-resources group. Gibbs was previously with Chicago-based Fifth Third Bank as vice president of public funds, but spent the bulk of her career in the education sector. Before Fifth Third she was CFO at Loyola University, treasurer and vice president of business and fiscal affairs at Ohio-based Wright State University, and controller for Ohio State University. Gibbs has also worked as a consultant to nonprofits. She succeeds John Hanle, who stepped down in early February after nearly 11 years with the ABA.
  • Newell Rubbermaid Inc. has named J. Patrick Robinson CFO. Robinson succeeds William T. Alldredge, who will retire at year-end. Robinson joined the consumer-products marketer as vice president and controller in June 2001 from AirClic Inc., where he was CFO. Before that he spent 18 years at Black & Decker Corp. Robinson is a CPA, having begun his career in the Baltimore offices of KPMG. Alldredge became Newell Rubbermaid’s vice president of finance and CFO upon the 1983 acquisition of cookware maker Mirro, where he had been president and chief executive.

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