Companies trading on the biggest US stock markets must get shareholder approval before granting stock options and other equity compensation under rules cleared by the Securities and Exchange Commission (SEC).
The SEC in Washington approved changes to listing standards for 6,200 companies selling stock on the New York Stock Exchange and NASDAQ Stock Market.
The SEC had asked US exchanges to toughen standards after investors complained that option grants contributed to accounting abuses at Enron Corp and WorldCom Inc by creating incentives for executives to exaggerate profits.
"These rule changes are an important step by our nation's principal markets," SEC chairman William Donaldson said in a press release. "They have responded to the commission's call for an increased shareholder voice in the equity compensation practices of listed companies."
The new rules also require companies to get shareholder approval before changing the exercise price of existing option grants, which set a price for buying shares in the future.
Companies often lower the strike price on options when a stock's decline has made the options worthless.
Option grants became a popular form of executive compensation during the bull market of the 1990s. They came under attack during the market's three years of declines.
"Shareholder approval of equity plans is common sense and should be required, because ultimately shareholders are the ones paying for it," said Ann Yerger, deputy director of the Council of Institutional Investors, which represents funds managing a total of more than US$2 trillion.
The new listing standards replace a pilot program administered by the NYSE that allowed companies to avoid a shareholder vote when equity compensation programs were made "broad-based" by including lower-level employees in the stock and option grants.
That exemption had created a ``loophole companies used to escape shareholder scrutiny,'' said Richard Ferlauto, director of pension investment policy for the American Federation of State, County and Municipal Employees, an association of labor unions with pension assets of more than US$1 trillion.
Under the NYSE's new listing standards, brokers that hold securities on behalf of customers wouldn't be allowed to vote on equity-compensation plans without instructions from the owners of those shares. Some companies fought that provision, saying it would make it hard for them to get a quorum of shareholder voters since brokers have custody of most customer shares.
The brokers "always vote for management," Yerger said in support of the new rule on broker voting.
"It's stuffing the ballot box." NYSE Chief Executive Dick Grasso said the rules will help rebuild investor confidence.
"Empowering America's 85 million investors by giving them greater voice in matters such as equity compensation is a critical element in increasing their confidence in the public companies they own and the equities markets in general," Grasso said in a press release.