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Spokane, Washington  Est. May 19, 1883

Donaldson puts some bite into SEC office



 (The Spokesman-Review)
Bert Caldwell The Spokesman-Review

The U.S. Securities and Exchange Commission, shamed by enforcement actions undertaken by its state counterparts, has finally begun to throw its weight around under Chairman William Donaldson.

Under Donaldson, the SEC has taken after mutual funds that bent the rules to help big investors, the New York Stock Exchange and former head Richard Grasso, and corporate voting procedures that make it all but impossible to oust directors no matter how egregiously mismanaged the company.

His predecessor, Harvey Pitt, was a clueless lapdog given to holding meetings with the very companies his staff was investigating. Pitt was forced out after two years of seat-warming.

Donaldson seemed an unlikely reformer. Himself a former NYSE chairman, Donaldson has held a variety of high financial, academic and political positions. In confirmation hearings before the Senate Banking Committee in February 2003, he spoke harshly about aggressive state securities enforcers who had essentially usurped an SEC that had failed badly its duty to oversee the nation’s financial markets.

The SEC had come late to investigations into stock analyst conflicts of interest that cost individual investors billions. New York Attorney General Eliot Spitzer was doing almost all the heavy lifting.

But Donaldson began to muscle up almost immediately. The result? He has found himself allied with the two Democratic representatives on the commission supporting reforms that are opposed by the two Republican members, as well as business interests and members of the Bush administration.

Take the Security Holder Director Nominations Rules, for example. Put simply, the changes would make it much easier for stockholders to make nominations to corporate boards. That power is usually held by the existing board, or a nominating committee composed of board members. Stockholders either endorse the nominations or withhold their vote to show their disapproval. Donaldson has likened the system to elections in the former Soviet Union. Good comrades knew how to vote, or else.

In director elections, opponents of board nominations must, in effect, beat someone with no one. Despite that handicap, investors in March nearly succeeded in ousting Michael Eisner as Walt Disney Corp. chairman by withholding 43 percent of the vote. The board responded by replacing Eisner as chairman, but retained him as chief executive officer.

The extensive reforms under consideration at the SEC would allow shareholders with 1 percent ownership of a company to seek inclusion of alternative board nominees in company proxy materials. If that proposal receives a majority of the shares voted, shareholder and board nominees would appear side by side on the next year’s proxy. Or an alternative could be included if 35 percent of votes for a board nominee are withheld, as was the case at Disney.

The Business Roundtable and advocates for small investors have expressed reservations about many aspects of the SEC plan. The Council of Institutional Investors, of which the Washington state Investment Board is a member, says the reforms do not go far enough.

Any measure that would democratize proxy voting would be welcome, even if it does not go as far as the original reforms. Shareholders own the company, but have pathetically little control over its affairs. Grossly inflated executive salaries and other abuses are due in no small part to self-perpetuating boards of directors as vulnerable to shareholder revolt as Joseph Stalin was to a restive Communist Party.

Donaldson is reportedly pulling back from some of the more aggressive proposals before the SEC, but holding to the conviction that corporate governance needs fixing. His intervention has much to do with the ouster of Grasso after disclosure of his $139.6 million pay package. That was a good start. More muckamucks need to get the same message, especially with indications executive compensation is again on the rise.

While signs of new SEC activism are encouraging, news from Olympia is less so. Deb Bortner, for 10 years director of the Securities Division of the Washington Department of Financial Institutions, was reassigned two weeks ago to a lesser position in another division.

Bortner was a leader among state securities regulators, most recently taking an active role in the investigation of financial analyst corruption and bringing the shaky finances of Metropolitan Mortgage & Securities Inc. to the SEC’s attention. Washington investors had no better ally.