(The news featured below is a selection from the news covered in SEC Today, which is distributed to subscribers of SEC Today.)

Campos Supports Shareholder Majority Voting Initiatives

In remarks at a program on corporate responsibility in Boston, SEC Commissioner Roel Campos offered his views on what it takes to be an effective board member. He also talked about the increase in shareholder activism aimed at holding directors accountable. Campos said he strongly supports majority voting for directors and believes it will become the norm.

When corporate boards are challenged by shareholders, Campos said it seems prudent to have an open mind rather than automatically viewing the action as hostile, especially if the confrontation is by a large shareholder. The push for majority voting has affected a large number of corporations over the last proxy season. Campos cited a study which found that at least 28% of companies in the S&P 500 had adopted a majority vote policy, by-law or charter provision. Campos urged all companies to adopt charter or by-law provisions to establish majority voting for directors. It is the only way to give shareholders a measure of control over who serves as directors at the companies in which they invest, he explained.

Although the SEC's and the self-regulatory organizations' rules require independent directors on certain board committees, Campos questioned how truly independent directors can be given that most are nominated by existing directors. The one group that has little or no power in nominating or selecting director candidates is shareholders, he said. Under the plurality voting system, it is next to impossible for shareholders to remove a director from the board. Directors are supposed to run the company on behalf of the shareholders, but they have no power to choose or to remove the directors, Campos said.

The SEC's proposal to permit shareholder nominees in certain circumstances proved too controversial and has not been adopted. As a result, Campos said that large shareholders took matters into their own hands, first by attempting to duplicate the proposal through the shareholder proposal/proxy process. The Division of Corporation Finance, however, generally permitted companies to exclude those proposals from their proxy statements.

Shareholders then submitted precatory requests seeking majority voting policies that would require directors to resign if they failed to receive a majority of votes cast. Other proposals would require that companies amend their by-laws to allow majority voting for director elections. The Division generally has not allowed these proposals to be excluded from proxy materials if properly phased and timely submitted, according to Campos. As a result, many companies have voluntarily adopted these measures.

Campos said a case pending before the Second Circuit could prove interesting if the court rules against the SEC. The Division of Corporation Finance's analysis has been challenged in AFSCME v. AIG. Campos said the court asked the SEC to file an amicus brief on the matter, but the SEC instead chose to have the Division and the general counsel's office submit a letter to explain their position.

Campos cited a memo written by the Wachtell Lipton law firm which advised that the majority voting standard continues to gain momentum and will become universal. Wachtell Lipton suggested that companies, at a minimum, adopt corporate governance policies that provide for majority voting and also seriously consider whether to adopt a majority voting and director qualification by-law. Campos said he agrees with the views outlined in the memo. If companies would adopt these policies, shareholders would be able to "vote off" board members without engaging in a proxy contest. Campos believes the policies would create an incentive for directors to be more responsive to shareholders.

Campos reviewed a number of enforcement cases brought against directors, including one in which he cast the sole vote for more severe sanctions. In the Heartland director liability case, Campos believed the directors were reckless in allowing certain redemptions at an inflated price, while other investors received only a fraction of their investment when the fund went into receivership. He said the directors knew the fund had a mispricing and liquidity problem but failed to take action. The SEC concluded that their actions were negligent, rather than reckless, and imposed a cease and desist order on those directors. Campos dissented to that decision because he believed that the sanctions should have been more severe.

Campos also discussed recent stock option back-dating cases. He said he would not be surprised to see charges brought against outside directors in future cases. His advice is not to use "as of" dates for stock option grants unless the consequences have been thoroughly considered, and not to assign critical board functions to a committee of one. Committees of one are not consistent with best practices in corporate governance, in his view.