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Conference Panelists Discuss Director Nominations and Shareholder Communications

Panelists at the October 15 Practising Law Institute/American Management Association directors' program on corporate governance discussed the responsibility of boards in director nominations, shareholder communications and audit committee responsibilities. Richard Ferlauto, the director of pension and benefit policy for AFSCME, said it is the duty of the corporation to create wealth for its shareholders. The role of shareholder activists is to rewrite the balance in the corporate governance triangle, he said, and that is what the SEC's proxy access proposal will help accomplish.

AFSCME members took an enormous hit as a result of the Enron debacle and other corporate scandals, according to Ferlauto. The only way to right such egregious behavior is to take a more aggressive approach to share ownership, he said, and corporate governance is the primary management tool for the creation of wealth. AFSCME targets 20 to 30 companies a year where corporate governance matters are a concern. If the problem is not resolved through communication, AFSCME will use the shareholder proposal process to put the matter before the shareholders for a vote. Over the past five years, 30% of AFSCME's shareholder proposals have achieved a majority vote, Ferlauto reported, but often with little response from management.

Ferlauto said that after the WorldCom scandal, while the Sarbanes-Oxley Act was still being put together, AFSCME concluded that its institutional share ownership could not be asserted as long as boards of directors handpick members who will follow them without any input from shareholders. Most failed boards have been very isolated, he said, which is why AFSCME is promoting proxy access. AFSCME sought a simple means to hold directors accountable. If that had been available, Ferlauto maintained that the Sarbanes-Oxley Act would not have been needed. Shareholder access is the missing piece for failed boards, in AFSCME's view.

After a protracted battle with the SEC over access to the ballot, the SEC ultimately proposed rules that went beyond what AFSCME was seeking. Ferlauto noted that the proposal is still awaiting final action, but SEC Chairman William Donaldson has said that he is committed to the concept of shareholder access. Ferlauto added that AFSCME is not advocating that its own representatives be put on boards of directors. AFSCME has conducted its own search for qualified candidates as alternatives to the management's slate in the past, as it did with Marsh & McLennan.