‘Controlled’ Companies Taking Advantage of Loophole

By calling themselves "controlled" corporations, dozens of companies are dodging rules created to make corporate boards more isolated from management, the Wall Street Journal reported.

Companies that have filed with the Securities and Exchange Commission saying that a majority of their board members will not be independent include Cox Communications, EchoStar Communications Corp. and Weight Watchers International Inc., the Journal reported.

Another avenue around the new rules involves companies that are not forming independent compensation committees to oversee executive pay. These companies include Primedia Inc. and Cablevision Systems Corp, among others.

The title of "controlled corporation" means that more than 50 percent of the voting power on a board lies with a single person, a family or other group of shareholders that vote as a block, the Journal reported. These companies are taking advantage of a loophole to get around rules required by the New York Stock Exchange and Nasdaq, which were adopted after the corporate failures of the late 1990s.

Some say that by avoiding the rules adopted to instill investor confidence, these companies run the risk of alienating stockholders by giving a single person, family or group controlling interest in a company.

Connecticut's State Treasurer and the Council of Institutional Investors unsuccessfully lobbied the Big Board and the SEC against the exemption, the Journal reported, adding that the SEC signed off on it when it approved the new corporate-governance standards last year.

"The exception ... was made because the ownership structure of these companies merited different treatment," the New York Stock Exchange told the Journal. "Majority voting control generally entitles the holder to determine the makeup of the board of directors, and the exchange didn't consider it appropriate to impose a listing standard that would in effect deprive the majority holder of that right." A spokeswoman for Nasdaq told the Journal that the exemption "acknowledges the unique ownership rights of a majority controlled company."

Cox Communications, which qualifies for the exemption because it is controlled by the Cox family's Cox Enterprises Inc., told the Journal that it "doesn't need to have a majority of independent directors for shareholders to be protected because the controlling company's interests are aligned with the shareholders."

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