Opinion: SEC Gets It Right on New Investor Rules

(Sept. 2) -- You may think the topic of "proxy access" has nothing to do with you, if you've even heard of the term. But if you own stock, directly or through mutual funds, want to retire someday or want to keep your job, you'd be wrong ... way wrong.

The topic and recently announced changes in Securities and Exchange Commission rules have everything to do with the health of our economy. We've seen far too many corporate debacles as a result of poor corporate decision-making, which have laid low our economy and cost us trillions to try to fix. In an effort to get better decision-making, the SEC recently changed the rules to make managements and boards of directors more accountable.

However, big business -- which, along with yours truly, is properly railing against the anti-business tone of this administration -- is grossly overreacting to these rules and jeopardizing support for steps needed to restore the balance between business and government.

To summarize: The SEC, in accordance with the recent financial regulation bill, last week adopted rules that make it easier for substantial (at least 3 percent) minority investors in public companies to get their director candidates on proxy cards (ballots) to mount a meaningful challenge to management slates.

The goal is make directors more accountable for their performance -- by making them easier to remove -- in order to enhance investor returns and prevent the socially costly corporate debacles we have seen in the last decade, such as Enron, WorldCom, Bear Stearns and Lehman. Such replacement is already allowed under SEC proxy rules; the new rules simply expedite -- albeit substantially -- the mechanics for such action.

For large companies, taking advantage of the rules will require owning at least $500 million of stock and often much more; for companies such as Apple, Google and GE, it means in excess of $3 billion. These are certainly substantial investors who deserve to have their voice heard, and not leftist wackos obsessed with rectifying inequality.

It seems like pretty tame stuff. Yet the reaction of the big business lobby would have us believe that Karl Marx, Hugo Chavez and Fidel Castro have just taken control of the SEC.

The Wall Street Journal resorts to atypical, overheated rhetoric by describing the new rules as "[Saul] Alinsky Wins at the SEC" and asserting, without any evidence, that "this new rule will be used not by mom and pop investors, but by union funds and other politically motivated organizations seeking to force mom and pop to support causes they otherwise would not."

In keeping with the hysterical tone, an unnamed spokesperson for the U.S. Chamber of Commerce (with which I'm usually in agreement) declared that it will fight this action "using every method available."

David Hirschmann, the chamber's president and CEO of its Center for Capital Markets Competitiveness, characterized the new rules as allowing "the proxy process to be [used] to give labor-union pension funds and others greater leverage to try to ram through their agenda," which "makes no sense."

Apart from the fact that purely private investors such as hedge funds, many of whom aggressively pursue better governance in their portfolio companies strictly in order to make money, also benefit from the new rule, this comment ignores the distinction between unions and pension funds. The latter, in accordance with both law and common sense, must focus solely on generating financial returns sufficient to pay promised benefits.

Ironically, these reactions are quite unhelpful to the cause of getting the government off the back of the private sector. Rather than impose new mandates on the private sector, the action simply seeks to make companies more accountable to those supplying large amounts of capital to them. What could be more American? The rules don't introduce new financial liability for poorly performing directors; they simply make it easier for someone to replace them after the fact.

These howls of protest to relatively moderate action lend credence to the arguments of the administration and others that business is only looking out for itself. Business needs to take a longer view than we are seeing.

If the business community truly wants to use the 2010 and 2012 elections to get the country back on track and stop creeping socialism, it's imperative that it recognize how counterproductive its current position on the SEC rules is.