On July 15, 2002, as the Senate bickered over but eventually defeated tough stock option reforms, the Securities and Exchange Commission (SEC) agreed to change a key policy involving stock option plans. Following President Bush's plan, the change helps to bring the accounting for options out of the shadows by giving shareholders more opportunities to vote on compensation plans listed in corporate proxy statements.

Under its previous policy, the SEC's Division of Corporation Finance would generally allow companies to exclude shareholder resolutions about broad-based equity compensation plans from their proxy statements on the basis that these resolutions were related to "ordinary business" matters. Going forward, the "ordinary business" exception will no longer apply to the following:

• Any proposal that focuses on equity compensation plans limited to senior executive officers and directors.
• Any proposal that focuses on equity compensation plans that potentially would result in material dilution to existing shareholders, regardless of who participates in the plan.

Major pension provider CREF, the equities arm of TIAA-CREF, praised the shift in policy, saying that proxy resolutions it had submitted to several companies were disallowed by the SEC. "We are gratified that the SEC recognized the importance of the shareholder approval mechanism," said Peter Clapman, senior vice president and chief counsel for corporate governance at TIAA-CREF. CREF had submitted the resolution to 13 companies this year. Proposals were withdrawn at eight companies, including four where companies agreed to implement the requested policy, and discussions are continuing at four firms.

The SEC's new staff interpretation, which applies to all public companies, is documented in Staff Legal Bulletin No. 14A.

-Rosemary Schlank