“Ignoring the Pleas of Investors”
Nazareth, who has announced her intention to step down from the commission, criticized the process used to arrive at the decision to block access. “The vast majority of [those submitting public comment] on the non-access proposal opposed it, yet the commission is ignoring the pleas of investors and proceeding down this path,” she said at the meeting.

Nazareth said the Republicans’ move to support the non-access rule was an “11th hour” decision that was only made “after it was clear that an access proposal would fail to pass with a shorthanded commission.”

During the meeting, Cox emphasized the importance of preserving the agency’s “status quo” of the last 17 years--the right of companies to exclude proxy access proposals--while the commission debates a possible broadening of access rights next year.

However, Tracey Rembert, senior governance analyst for the Service Employees International Union’s (SEIU) capital stewardship program, noted that “the status quo was there were proxy access proposals all this year.”

In September 2006, the U.S. Court of Appeals for the Second Circuit ruled that the SEC staff had improperly allowed American International Group (AIG) to exclude a proxy access proposal by the American Federation of State, County, and Municipal Employees (AFSCME). The Second Circuit faulted the agency for its inconsistent interpretations of Rule 14a-8(i)(8), which permits the exclusion of shareholder proposals that “relate to an election of directors.”

After that ruling, the SEC expressed “no view” on a request by Hewlett-Packard to omit an access proposal. As a result, proxy access resolutions went to a vote at HP and two other firms this year.

AFSCME and several state pension funds, including the nation’s largest, the California Public Employees’ Retirement System (CalPERS), sent letters to the SEC in mid-November urging Cox to let the AFSCME v. AIG decision stand for 2008.

“I fully understand why these requests are being made, because many believe that codifying [the right of companies to exclude proposals] would take the wind out of efforts to improve the way the proxy process works for investors,” Cox said.

Commissioners Casey and Atkins reiterated Cox’s argument that the absence of a hard-and-fast rule on access would cause legal uncertainty, because the Second Circuit’s decision would not apply nationwide if another federal appeals court ruled differently.

CalPERS CEO Fred Buenrostro disagreed. “[P]roxy access has created no uncertainty in the market this year,” he said in a press release. “There have been no related legal challenges because of this illusory uncertainty. Instead of acting responsibly on this issue with a full commission, the SEC has adopted a flawed measure that is contrary to the very purpose for which it was established.”

Potential Legal Challenge
While Cox said the SEC acted to prevent legal uncertainty, several investors already are preparing for a potential court fight over the commission’s decision. On Nov. 28, AFSCME filed access bylaw resolutions at JP Morgan Chase and Bear Stearns. The companies’ shares have fallen because of subprime lending losses, and AFSCME wants shareholder input on board nominees to address concerns about possible mismanagement by top executives.

North Carolina's state treasurer joined in filing both proposals and New Jersey's Division of Investments co-filed the Bear Stearns proposal.

“We’ll be urging those companies not to omit proxy access from their ballot,” Richard Ferlauto, director of pension and benefit policy for AFSCME, said in a statement. “But if they seek relief from the SEC, we are prepared to go to court to preserve the [AFSCME v. AIG] decision.”

Ferlauto added that AFSCME chose the two companies because they are incorporated in New York, one of the three states overseen by the Second Circuit. The likelihood of a ruling opening the door to proxy access once again is greater in a court that already ruled that the SEC misinterpreted its own rules, Ferlauto said.

Lawmakers Express Disappointment
Two prominent Democratic lawmakers--House Financial Services Committee Chairman Barney Frank and Senate Banking Committee Chairman Christopher Dodd--expressed disappointment and said the SEC should have deferred action until it had a full set of five commissioners.

In a statement, Frank said the SEC’s action “will leave shareholders with inadequate recourse to influence insular boards that are unresponsive to shareholder concerns, by effectively precluding shareholders from proposing changes to director election procedures.”

Dodd said he may introduce legislation to reverse the SEC’s action. “I don't think it's fair,” the Connecticut senator told the Reuters news service.

Ferlauto said the SEC’s decision to bar access for the 2008 season amounts to a black mark on Cox’s legacy, branding him as an anti-shareholder chairman.

A reputation of unfriendliness to shareholders could eventually drive investors away from U.S. markets, Nazareth warned. Earlier this week, The Wall Street Journal reported that CalPERS and other large U.S. state pension funds are shifting more of their investments to foreign markets.

Investors have the right to nominate or remove directors in virtually all other developed countries. Several pension funds in the United Kingdom and Australia, as well as the London-based International Corporate Governance Network, urged the SEC not to take away the right of investors to file access bylaw proposals.

“European investors are clearly not pleased” by the commission’s decision, said Rembert of the SEIU.

In an editorial before the SEC vote, the Financial Times was skeptical of the argument by U.S. corporate advocates that proxy access might drive some companies to move overseas. “There’s a flip side to the competitiveness argument--international investors, too, can go anywhere,” the London-based newspaper wrote. “Why would they choose a country where they have fewer rights?”

Ted Allen contributed to this article.