As a result of the financial crisis, there have been a number of investor favorable proposals and announcements made by regulatory agencies, federal and state governments, and prominent proxy advisory firms on matters relating to corporate governance. Although a number of the proposals have been delayed in their implementation and are subject to intense debate, public companies need to understand these developments, as the proposals may have ramifications on how companies are managed, how their executives are compensated and how they prepare for their annual shareholder meetings.
Smart Business spoke to Jonathan Friedman, associate with Stubbs Alderton & Markiles, LLP, about recent corporate governance developments.
What are some of the areas of corporate governance where changes are being proposed?
In 2009, a number of legislative and regulatory corporate governance initiatives were introduced. For example:
- Advisory say-on-pay votes: A number of legislative proposals introduced in 2009 include rules mandating that public companies provide their shareholders with an annual vote on executive compensation (‘say-on-pay’). Similar proposals have been made with respect to voting on ‘golden parachute’ agreements for executives in the context of change-in-control transactions. Say-on-pay voting has gained considerable traction with shareholder activists, and several notable companies, including Apple and Microsoft, are planning advisory votes on compensation. It is likely that rules relating to say-on-pay will be adopted; however, the final form of such rules remains uncertain.
- Shareholder proxy access: The U.S. Senate and the Securities and Exchange Commission have proposed rules that would require public companies to grant proxy access for director elections to shareholders. This would allow shareholders who meet certain eligibility requirements to nominate candidates to a company’s board of directors without the shareholder having to bear the cost of preparing its own proxy statement and solicitation.
- Corporate governance: Legislation has been introduced that would, among other things, require companies listed on National Securities Exchanges to (i) have a chairman of the board of directors that is ‘independent’ and has not previously served as an executive officer of the company, (ii) prohibit classified boards of directors (which generally are implemented to discourage hostile takeovers) and require that all directors stand for election annually, and (iii) require majority voting in uncontested director elections. Earlier in the year, the SEC approved an amendment to New York Stock Exchange Rule 452, which is applicable to all public companies and prohibits brokers who hold shares in ‘street name’ for their clients from voting in uncontested director elections on behalf of their clients when they have not received voting instructions from those clients.
- Additional disclosure in annual reports and proxy statements: The Securities and Exchange Commission has proposed rules that would, among other things, require additional disclosure in annual reports and proxy statements on (i) the relationship between a company’s overall compensation policies and how such policies may impact risk-taking behavior at the company, (ii) the qualifications of directors and director nominees to serve on the company’s board, (iii) a company’s leadership structure, (iv) the board of directors’ role in the risk management process and (v) potential conflicts of interest between compensation consultants and the company.
What steps should companies take now to prepare?
Although the above proposals are still under consideration, and it is unclear which proposals will ultimately be adopted, companies need to remain informed of new developments as they occur and be prepared to respond to new rules or legislation as it is implemented. Among other things, companies should consider what changes would need to be made to their governance practices in the event that the suggested legislation or rules are adopted as proposed.
Companies should also consider whether their corporate governance practices are appropriate from both a business and shareholder perspective in view of the specific issues and risks facing them. In conjunction with this analysis, companies may want to evaluate how their governance practices are perceived by their key shareholders and by proxy advisory groups, such as Risk Metrics. Similarly, as a result of the focus that is being placed on executive compensation in these challenging times, it is critical that companies understand how the compensation of their executive officers is determined and whether such compensation packages align the interests of the executive officers with the shareholders of the company.
With the 2010 proxy season around the corner and in view of enhanced scrutiny that public companies are likely to continue to face in 2010, boards of directors, with the aid of their corporate advisers, should be actively considering governance issues. Even if a board elects not to make policy changes at this time, the consideration of governance issues will enable boards to better respond to legislation or new rules as they are implemented.
Jonathan Friedman is an associate with Stubbs Alderton & Markiles, LLP. Reach him at firstname.lastname@example.org or (818) 444-4500.