CA, the Long Island-based software company formerly known as Computer Associates, will hold its annual shareholder meeting later this summer. The company is struggling to emerge from a devastating accounting scandal, dating back to 2000, that has ensnared many of its former top executives. CA's shares are down 26 percent this year.
Given this dismal situation, it is not surprising that some CA investors might want to exercise their rights to oust a director or two. Amalgamated Bank's LongView Collective Investment fund tried to do just that by submitting a shareholder proposal that would have allowed CA shareholders to vote either to keep or to dump directors Alfonse M. D'Amato, a former United States senator from New York, and Lewis S. Ranieri, former vice chairman of Salomon Brothers. The law in Delaware, where CA is incorporated, allows for such removals.
LongView has said that both men were on hand during a period of misconduct, and that CA's shareholders should decide whether they go or stay. CA has said that shareholders have benefited from the two directors' services. A representative from CA did not return a phone call on Friday afternoon seeking comment.
The S.E.C., however, has ruled that CA can exclude the proposal from its proxy, meaning that its shareholders will not be able to vote for or against the two directors. The best the shareholders can do, if they are disappointed in their performance, is to withhold support for the directors. That is an exercise in futility, because they win re-election anyway.
By allowing CA to exclude the proposal, the S.E.C. relied on federal law, which essentially holds that proxy proposals are not supposed to be used as vehicles for changes in board composition. Such changes should instead be made in full-blown proxy fights, featuring dissident slates of directors for shareholders to consider. The S.E.C. has ruled this way many times before.
"If you believe that shareholder voting on directors needs to be more active, then you will believe that this election exclusion is an impediment and a bad policy," said Lawrence A. Hamermesh, a professor of corporate and business law at Widener Law School in Wilmington, Del. "If you believe that shareholders' activity relating to the election of directors is not the best way to make directors and officers more accountable, then you are going to side with leaving the election exclusion where it is."
But with director accountability so much on shareholders' minds, what better time than now to reconsider how to give owners more power in the election — or ouster — of directors who purport to serve them?
LONGVIEW has appealed to the S.E.C. to review its position on the CA proposal. In a letter to the commission sent on Friday, Cornish F. Hitchcock, a lawyer who represents the fund, summed it up this way: "The issue is whether the commission will interpose itself between a company and its shareholders when the shareholders believe that certain directors should be removed from office and when state law empowers such removal."
Unfortunately, the S.E.C.'s view that such proposals should be excluded from proxies gives shareholders hoping to change the makeup of their company's board a deeply unsatisfying choice.
They must either put up a dissident slate, which costs millions of dollars, or accept a nonexistent role in director elections.
Gary Lutin, an investment banker at Lutin & Company in New York who advises on corporate control contests, suggests the following metaphor. "Blocking the shareholder's right to remove directors," he said, "leaves us with the corporate equivalent of a political process with no steps in between mailing letters to your congressmen and mounting a revolution."
And it will probably mean less vigilance from directors who know that, barring a disaster of Enron proportions, they cannot be fired.