SEC's rules more harm than good

Uncertainty has been a constant undercurrent of the past two years, threatening to pull businesses and economies under.

Uncertainty about terrorism.

Uncertainty about SARS and other health scares.

Uncertainty about the fate of companies, the malfeasance of their officers and the nest eggs of their investors.

It was enough to have potentially crippled many of the world's economies.

But even in the face of this uncertainty, U.S.

companies managed to maintain their resolve, and today, we're seeing signs that the economy is starting to grow dramatically again.

Gross domestic product has increased by record levels.

Employment figures have remained solid.

And manufacturing activity showed its strongest gains in two decades.

This is encouraging news but in order to maintain this momentum, we must proceed with care to ensure long-term economic expansion rather than a return to uncertainty.

That means we should provide a fertile environment for growth, and work to avoid some of the unnecessary and ill-conceived regulations that have mired other economies in the sand.

Unfortunately, unnecessary and illconceived regulations seem to be exactly what we are getting from the Securities Exchange Commission.

Under the guise of promoting better corporate governance, the SEC has proposed new shareholder access rules that will add yet another layer of uncertainty to the operations of U.S.

public corporations.

These rules neglect both the potential damage they might cause and the serious degree to which they could take corporations off-track during recovery.

And, besides, they're bad corporate governance.

The primary concern is that the SEC has overlooked the important progress that has been made in corporate governance over the past two years, and is embarking on a regulatory adventure before assessing the full impact of current reforms.

Positive impacts of the Sarbanes- Oxley Act and related SEC rulemaking (for which the SEC should be commended) and the approved corporate governance listing standards of the NYSE and NASDAQ are cementing corporate America's dedication to improving corporate governance.

And, while we recognize these are early improvements and more work lies ahead, we should evaluate how these changes impact corporations' responsiveness to shareholders before mandating more new rules which will detract boards, raise corporate expenses and deter innovation.

The second concern is the breadth of the SEC's proposed shareholder access rules.

The proposed rules simply cast too wide a net, sweeping in not only corporate wrongdoers and companies unresponsive to their shareholders, but also companies that have consistently demonstrated responsiveness to their shareholders and a commitment to sound governance.

In fact, many, if not all, U.S.

public companies would be subject to the proposed rules, should they be enacted.

This one-size-fits-all approach could impose penalties on companies that practice exemplary corporate governance and are responsive to their shareholders.

That's exactly the type of uncertainty those companies don't need and certainly don't deserve.

Rather than this broad stroke approach that the SEC seems determined to enact it should revise the proposal to target unresponsive companies and allow those that adhere to best corporate governance practices to continue unencumbered by the new regulations.

But the most serious concern with the proposed rules is the way in which they open the doors for special interest groups to hijack the director election process by emboldening groups that do not represent the interests of all shareholders.

The involvement of these special interests will bring the worst of our partisan electoral system to the corporate boardroom, lead to acrimonious proxy fights, and produce badly divided boards that will have difficulty functioning as a team.

Among all its responsibilities, corporate boards are primarily responsible for the "big picture," especially in terms of oversight and return on investment to shareholders.

It will be difficult for a board composed of an uneasy collection of special interest directors to keep its eye on the "big picture" rather than the limited agenda of the specific group or minority interest that elected them.

The SEC has the responsibility to police the financial markets and safeguard those markets for investors.

But it also has the obligation to carry out that role in a way that does not penalize well-functioning companies and undermine economic expansion.

Its proposed shareholder access rules fail to meet that obligation by injecting uncertainty in a process that can only thrive without it.

Amidst this uncertainty, the SEC should suspend consideration of its proposed shareholder access rules until it can be certain of the impacts of the corporate governance reforms already underway.

J.

Paul Sutton is president of Corporate Planning & Finance in Reno and has been in top management positions in several manufacturing companies.