US CEOs start to dig in against governance reforms

US chief executives, laboring under scores of new rules to prevent future corporate catastrophes like WorldCom and Enron, are digging in, un...

US chief executives, laboring under scores of new rules to prevent future corporate catastrophes like WorldCom and Enron, are digging in, unwilling to cede more ground to corporate-governance reformers.

New battle lines have been drawn — a year after costly scandals drove the stock market to five-year lows and crippled institutional and retail portfolios — in the debate over a proposed rule change that would give shareholders a much greater say in nominating directors.

More broadly, the nomination issue has companies, their advisers and critics wrestling with the question: How much more regulation is required to prevent another simultaneous failure of corporate ethics, regulatory oversight and accountant accountability?

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“None of this is free. The cost of auditing fees, attestations, the (rising directors and officers) premiums,” said Pat Rondeax, partner with Hale & Dorr. “This time and expense has not been dripping out, but has been like a dam bursting, and companies are feeling a bit distracted from delivering value to shareholders.”

The Business Roundtable (BRT), America’s leading CEO group, has been stirred to action by Securities and Exchange Commission (SEC) chairman William Donaldson’s effort to bring greater democracy to the proxy process. Its reaction ends a year of conspicuous silence in corporate governance issues.

The CEOs argue that all the new rules — from Sarbanes-Oxley to the pending tighter Nasdaq and New York Stock Exchange listing standards — are enough. “I think everyone is asking how much is enough, and what the industry standard and best practices are going to be,” said Isaac Lustgarten, attorney in the New York office of Arnold & Porter. The CEO opposition, detailed in a BRT letter to the SEC last Friday, comes after an extraordinary outpouring of rules and regulations — the legislative response to WorldCom Inc and other corporate scandals that essentially recast 60 years of established securities law.

Right now, the nomination of new board members is solely the province of the board nominating committee. If ‘democratisation’ efforts are successful, shareholders with large stakes, such as 3 per cent, could place board nominees on the proxy. Labour unions and state retirement plans support the SEC’s initiative.

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A BRT spokesman said group chairman John Dillon, who is chairman of International Paper Co, was not available to comment, nor was Henry McKinnell, vice-chairman of the BRT Corporate Governance Task Force who signed the letter to the SEC. McKinnell is chairman of Pfizer Inc. “I think it is important to allow Sarbanes-Oxley, the NYSE, Nasdaq and SEC rules to become implemented to see how they work,” said Rick Steinberg, head of the corporate governance practice at the PricewaterhouseCoopers.

“I have seen a significant change in boards in terms of how they function, how they take their roles much more seriously, so I don’t think any new rules are needed in that regard,” he said, adding a board with members hostile to each other risks becoming at the least, distracted, and at worst, paralyzed. The BRT was joined by the National Association of Corporate Directors, among other, in opposing the initiative. The SEC has also requested that the staff make a recommendationon the issue by July 15.