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investors fight off plan to curb voting rights – for now

December 2007

Socially responsible investors around the world breathed a sigh of relief late last month when the US Securities and Exchange Commission (SEC) drew back from plans to curtail their ability to raise corporate responsibility issues through advisory votes at annual company meetings.

The proposed changes, put forward by the securities market regulator in July, had provoked significant opposition because votes and resolutions at annual meetings are commonly used to bring about improvements in US corporations’ social and environmental performance. Some mainstream investors had also expressed concern.

The SEC announced on 28 November that it had decided not to place restrictions on the ability of shareholders to instigate advisory votes, and, in a related move, to encourage ‘electronic shareholder forums’ – online networks where shareholders can sign up to petitions and make their views known.

A record 34,000 investor comments – almost all against the proposals – were received by the SEC during the consultation period, which ended in October. The suggested amendments to the 1934 Securities Exchange Act raised the possibility of allowing directors to opt out of the shareholder resolution process , where state law allows, and raising the number of votes required to resubmit a proposal thrown out at previous meetings. Opponents, led by the US Social Investment Forum (US SIF), said any of the changes would have seriously damaged investors’ ability to raise important issues at annual meetings.

As a matter of state law, non-binding votes at annual meetings affect US corporations only – not the 1100 foreign companies with a US listing.

Tim Smith, US SIF board chair and senior vice-president of Walden Asset Management, who claimed the proposals would have ‘cut corporate governance and social and environmental shareholder proposals to the core’, welcomed the SEC’s decision to continue to allow advisory votes.

The US SIF says more than 95 per cent of resolutions filed in the past 35 years have been ‘advisory’ and these would no longer have been possible under one or more of the proposals. Non-binding votes on issues such as climate change, executive compensation, human rights and diversity have had ‘a profound and beneficial impact on corporations’, making them stronger and more responsible, it added. One in five publicly traded US companies face shareholder resolutions in a typical proxy season.

Investors outside the US had also expressed reservations. UK-based Henderson Global Investors, a global fund management company handling more than $123.5billion (£62bn) in assets, said the proposals had threatened to ‘eliminate or curtail the shareholder resolution process’. Director of SRI funds Tim Dieppe said that he had been opposed to any opt-out facility ‘as it is likely the most unresponsive companies would opt out’.

Among mainstream investors, the American Federation of State, County, and Municipal Employees Pension Plan, which has more than $1trillion (£478bn) invested, had also opposed any changes, which it said ‘would do more harm than good to shareholders’.

On the companies’ side, Tom Donohue, president of the US Chamber of Commerce, which supports curbs on proxy voting, said: ‘It’s no coincidence that the call to expand access to proxy statements is loudest from special interest groups, which, with a rule change, could force companies to make concessions they’ve been unable to achieve at the bargaining table.’

In a separate ruling made on the same day, the SEC limited the rights of shareholders to participate in the nomination of directors in an effort to clarify the position following a court decision in 2006 that invalidated the SEC’s interpretation of the proxy rules. It is anxious to avoid uncertainty in the next annual meeting season. SEC chairman Christopher Cox said: ‘We can reopen this discussion in 2008 to consider how to strengthen the proxy rules to better vindicate the fundamental state law rights of shareholders to elect directors.’

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