Since becoming chairman of the Securities and Exchange Commission in February, William H. Donaldson has made a good start at living up to his promise to look after the interests of ordinary investors.
Under Donaldson, the SEC has moved to restore honesty to Wall Street stock analysis, has sued numerous corporate executives for fraud and has moved forward in reforming corporate accounting.
That's why his positions on two recent issues are so disappointing
On Tuesday, Donaldson endorsed SEC staff proposals to make it easier for investors to nominate candidates for corporate directorships. But the proposals fall far short of what's needed.
Currently, incumbent directors control the process. They nominate candidates for vacancies, often deferring to the choices offered by the very executives the directors are to oversee.
Shareholders can field their own candidates, but those do not appear on the company's official ballot. Hence, it costs millions to mount such a challenge to the insider candidates, and success is rare.
After the string of scandals that began with Enron, it's clear that directors need to be more accountable to shareholders. That can only be accomplished with the establishment of true boardroom democracy that gives shareholders a choice of candidates for all seats.
Under the SEC staff proposal, alternate candidates would for the first time appear alongside the board's nominees on the company-sponsored ballot. But the staff said only some board seats -- perhaps just a quarter of them -- should be subject to contested elections. So most of the board seats still would have no competition on the company ballot. That will allow insiders to continue to dominate.
Also, there could be no contested election unless there had been a "triggering event," such as a board refusal to adopt a proposal supported by a majority of shareholders.
The staff proposal would require that companies better disclose their nominating process and make it easier for shareholders to communicate with directors.
Still, reading the 33-page staff report, you'd think democracy was a new and untried doctrine. What if the rabble got too powerful? They might actually elect directors who disagreed with the rest of the board on key matters! Horrors!
In fact, today's shareholders are more sophisticated than any in history. In most public companies, the bulk of shares are controlled by professional money managers for mutual funds, pension funds and insurance companies. These pros are not going to tear companies apart over personal agendas.
Skyrocketing executive pay and the corporate scandals of the past few years are the result of corporate directors' insulation from the shareholders they are supposed to represent. The insiders' lock on power needs to be broken.
Donaldson and his staff deserve credit for taking on an issue their predecessors have ignored for decades. But their proposal is a Band-Aid, and corporate America needs radical surgery. Hopefully, Donaldson and the other commissioners will toughen up before adopting new rules this fall or winter.
Guarding the turf
The second issue is a turf war between the SEC and state securities regulators. A bill moving through the House would prevent state regulators from reaching settlements like the one New York used to resolve the issue of biased "buy" and "sell" recommendations from Wall Street analysts.
New York Atty. Gen. Eliot Spitzer, who masterminded the $1.4 billion analyst settlement in April, strongly opposes the bill, arguing it would undermine state securities enforcement. Donaldson has not taken a position on the measure, but in recent comments he has made it clear he though securities rulemaking was the SEC's prerogative, not the states'.
Donaldson's position would be stronger if the SEC had an illustrious history of cracking down on wrongdoers, but it doesn't. Most SEC investigations end in negotiated settlements in which the offender pays a modest fine and promises not to violate the rules again.
To be fair, the SEC is a small organization, and it does not have the legal authority to bring criminal charges on its own. That's all the more reason to have state regulators helping out.
If Bill Donaldson wants to have the dominant role in regulating securities markets, he should demonstrate he'd do something impressive with it. The director-election proposal would bring a touch of democracy to the boardroom, but it's merely a form of democracy-lite. That's not impressive enough.