Fair elections? Not for U.S. companies Commentary: Thoughts on directors and democracy By Michael Collins, CBS.MarketWatch.com Last Update: 12:01 AM ET Jan. 31, 2004 ARLINGTON, VA (CBS.MW) -- Democracy is one of those funny concepts that most people support until there's a danger they won't win. Democracy can be messy. It can bring unexpected results. And it scares those in power, and those who think they know better than others how the world should be run. We like the idea of democracy, but we want our politics a little better organized. Look at the U.S. plan for choosing a provisional government in Iraq. The Bush administration (and many others) think throwing things open for a vote would bring chaos, so we've proposed a series of caucuses that are easier to control. They may be right. Elections are to come later, and perhaps a slower transition to democracy is what the shattered country needs. Here at home, we have a system where those in power pick the candidates, print the ballots, make sure there is no opposition and then count the votes. We're not talking about politics, although in some cases I'm not so sure. No, this is the system by which we "elect" the directors who oversee our public companies. They are supposed to represent us, the shareholders, but they are essentially chosen by management and incumbent boards. After researching how companies respond to the interests of their owners for a staff report last year, the Securities and Exchange proposed rules that would allow shareholders, in very limited circumstances, to put their own candidates for the board on the proxy ballot. The hurdles are set so high that cases of shareholder-sponsored directors will remain rare. But to hear the howls of protest from corporate America, you'd think the SEC was asking CEOs to justify their pay and perks. Telling Comments Reading the comments on any SEC proposal is an education. The comments on director nominations are particularly entertaining and revealing. It struck me as I browsed the letters from corporate leaders how many started by proclaiming their long support of good governance. They all apparently pushed hard for the reforms in the Sarbanes-Oxley Act. It reminded me of reporting from South Africa in 1994, where it was hard to find anyone who had supported apartheid, or Russia in 1992, when an amazing number of officials turned out to have been always opposed to communism. After the executives got their good governance credentials on the table, they started explaining the danger of democracy. Henry McKinnell, chairman and CEO of Pfizer (PFE: news, chart, profile) wrote on behalf of The Business Roundtable: "The proposal does not adequately recognize the expense corporations will feel compelled to incur to ensure that each director's primary loyalty is to the company and all shareholders, rather than to a coalition of union pension funds or other special interest groups." It sounds to me like he's saying with this rule, the company is going to have to spend more money to make sure its hand-picked directors stay on the board. What the letter from McKinnell and similar comments from executives at companies noted for corporate governance, like Sprint (PCS: news, chart, profile), fail to explain is how "special interest groups" will be able to hijack the process, unless of course they convince a majority of shareholders a director change is a good idea. Among the thousands of comments there are some real gems. Wendy L. Gramm, as director of the Regulatory Studies Program at George Mason University, argues against the proposal and says "the fundamental problem may be the presumption that the principles of political democracy can be effectively applied to corporate governance." Mrs. Gramm has the background in corporate governance to back it up -- she was, after all, on the highly effective board at Enron (ENRNQ: news, chart, profile). The 'Special Interests' But what about these rampaging special interests, intent on ruining corporate America by nominating corporate board members and fighting to get them elected? They filed comments as well. Nelson Phelps, president of a group of retired employees of Qwest, US West and other phone companies who own shares of Qwest (Q: news, chart, profile), makes the radical argument that "companies are the property of the shareowners." He and his colleagues then wonder why, as owners, they should allow most of the nominating power to stay with the executives -- who are, technically, their employees. "Recent corporate scandals suggest a systemic failure of effective board oversight and accountability to shareholders," Phelps writes. "This should not surprise, since the regulatory system maintains powerful disincentives for owners to effectively manage their property." Nell Minow, a veteran shareholder activist now tracking governance issues through The Corporate Library, calls the current system "a self-perpetuating closed loop" and says it has resulted in the corporate scandals that "revealed a systemic failure of boards of directors to provide meaningful or effective independent oversight of the corporate managers who select and compensate them, and who determine the agenda, the timing, quality, and quantity of information they receive, and even select the advisors they rely on." Wendy Gramm and others enamored of the current system argue that shareholders unhappy with the current management or boards should just sell their shares and walk away. Fortunately, Nelson Phelps and his fellow retirees seem willing to ignore her, and fight for the good of the companies they own. Michael Collins writes on consumer and investor issues for CBS MarketWatch. Comments in The Gadfly don't necessarily represent the opinion of CBS.MarketWatch. Michael Collins writes for CBS.MarketWatch.com.