Corporate Governance

Shareholders should have a right to know what risks their companies are taking, particularly after the white-knuckle 18-month market meltdown that erased trillions of dollars in wealth and a subsequent public bailout that jacked up U.S. national debt to exorbitant levels.

But the Securities and Exchange Commission, which was founded in 1934 to protect investors, has thwarted shareholder efforts to ascertain this risk, one investor group claims.

The group, led by attorney activist Sanford Lewis, is asking President-elect Obama to give shareholders greater rights to demand answers from companies on how specific risks may affect their business, such as exposure to volatile credit markets.

The group proposes that company managements be required to include such questions on its proxy statements for vote at annual meetings.

"Unfortunately, for the last five years, the SEC has gradually been closing the door to important shareholder concerns," the group said in a Dec. 11 letter to Obama signed by more than 60 investment firms and others. "Shareholder proxy requests that had been allowed in previous years asking for better disclosure of financial risks to companies have been stymied."

Shareholders have a right to make proposals to be included in proxy statements. But companies have a right to ask the SEC to exclude proposals they don?t like. The group claims that the SEC has taken an increasingly pro-management line in excluding proposals that are of valid investor concern.

For instance, it says that the SEC struck down a proposed resolution for the Washington Mutual proxy in the last year that would have asked the bank to "discuss its potential financial exposure as a result of the mortgage securities crisis." The crippled mortgage lender was sold to JPMorgan Chase a few months ago for a knock-down price.

The demand for increased proxy access is only the latest in a long-running controversy over how much power shareholders should have in imposing demands on companies through proxy resolutions. Activists want increased influence on board director nominations, management compensation and other issues.

Last year, the SEC voted down a proposal for wider proxy access, but some are optimistic that the incoming Obama Administration will appoint a new SEC chairman who will look more favorably on shareholder proposals. ?D.H.

Links:

Sanford Lewis Group

Letter to President- Elect Obama

KLD Blog