The past half-year or so has seen a host of corporate governance reforms in the US, which dramatically change the context of corporate power and accountability. In December 2009, the Securities and Exchange Commission (SEC) set the ball rolling by publishing Proxy Disclosure Enhancements, a 129-page document introducing new rules that took effect this February. And of course, this week President Obama signed Dodd-Frank, which introduces significant reforms – while also falling short of fixing the lopsided balance of power in our capital market system. This post surveys the changing corporate governance landscape.
We at The Murninghan Post introduce our ongoing series of inviting commentary from guest experts by appealing to Jennifer Taub, a corporate-lawyer-turned-academic who coordinates the Business Law Program at the Isenberg School of Management at the University of Massachusetts, Amherst. Taub has a knack for translating complex corporate governance concepts into plain English, so she’s a perfect choice to help survey this shifting terrain.
“Dodd-Frank is a major step forward for consumers, taxpayers and investors,” Taub says. “But, there are miles to go before we sleep. For nearly every advance in terms of protecting our interests, there is often some next move necessary. There are more than 200 rules that need to be written to implement many parts of the law. And, unfortunately, there are many areas of concern that remain untouched, or insufficiently addressed.
“Two years ago, our financial system nearly collapsed – it was like a giant truck ran off the road, resulting in a major pile-up,” Taub continued. “This didn’t have to happen. We had about 50 years of financial safety following the New Deal legislation of the 1930s, which implemented the regulatory equivalent of traffic lights, stop signs, and speed limits. But in the 1980s and ‘90s, we started to have more accidents – with the Savings and Loan crisis and accounting scandals, then the introduction of riskier instruments and excessive borrowing by banks. Instead of adding more safety rules and restrictions, we took them away. The prevailing ideology at the time was that we no longer needed safety rules, speed limits, traffic lights. So we dismantled the rules of the financial road and thus the crash of 2008. What Dodd-Frank attempts to do is to restore some of those rules of the road, some of those traffic lights and speed limits.”
To help map how we’ve traversed the past half-year and what the road looks like going forward, here’s the Murninghan Post rundown and analysis of key developments:
- Proxy access and board elections: Proxy access means that shareholders are allowed to nominate directors to “run for office” on corporate boards. Dodd-Frank punted on the issue of proxy access, leaving it to the SEC to establish rules regarding minimum ownership thresholds or holding periods for shareholders seeking to nominate directors. In June 2009, the SEC proposed changes to the proxy access rules. New rules are expected to be in place by 2011.
- Majority Voting: Currently, a single vote is all a board candidate needs to get elected, regardless of whether all other votes oppose the candidate – hardly a majority rule system! The SEC Investor Advisory Committee (IAC) Investor as Owner Subcommittee met on Wednesday to plan a major push on majority voting, according to Subcommittee Chair Stephen Davis, executive director of Yale’s Millstein Center for Corporate Governance and Performance. “I’m hoping we are able to get the IAC to speak with one voice, swiftly, to urge the Commission to action on this matter across the US marketplace,” Davis said. “Majority voting” in this context would require directors who fail to receive majority support to resign and be ineligible for reappointment.
- Executive Compensation and Say-on-Pay: Corporations must now offer shareholders an advisory vote on executive compensation, known as Say-on-Pay. Professor Jay Brown of the Sturm College of Law at the University of Denver suggests the SEC has expansive authority “to determine exactly what shareholders will be asked to approve,” which means that the Say-on-Pay vote would also apply to a longer list of individuals. While the Say-on-Pay vote is merely advisory, Brown observes that Directors who ignore the results may run afoul of their fiduciary obligations.
- Elimination of Broker Voting: Dodd-Frank prohibits stockbroker voting on management advisory votes and other compensation matters. This is a major breakthrough, because historically brokers have automatically voted with management, and not necessarily in the best interests of shareholders.
- Greater Transparency of Board Qualifications: This involves new annual company disclosure of the experience, qualifications, attributes, and skills of directors and nominees for director, and “the reasons why that person should serve as a director of the company at the time at which the relevant filing is made with the Commission.” The same information would be required in the proxy soliciting materials for director nominees made by other proponents. “This new disclosure will be required for all nominees and for all directors, including those not up for reelection in a particular year”;
- Interlocking Board Relationships: Companies must now reveal other directorships and legal entanglements that director or director nominees have held over the past 5 years;
- Diversity in the Board Nomination Process: Institutional investors have filed resolutions over the years to open up the boardroom to women and minorities. The SEC now requires disclosure of whether, and how, board nominating committees include diversity considerations in their deliberation process, and how effective that process is;
- Board Leadership Structure: This involves whether and why a company has chosen to combine or separate the CEO and board chair positions. The SEC did not endorse a particular leadership structure, but stated its belief that the investor would benefit from insights about why a company has chosen a particular one;
- Board Role in Risk Oversight: As the BP Gulf oil fiasco tragically demonstrates, everyone benefits from board competence concerning risk oversight. Companies are required to disclose how a board organizes and assigns responsibility for this, including “whether the persons who oversee risk management report directly to the board as whole, to a committee, such as the audit committee, or to one of the other standing committees of the board; and whether and how the board, or board committee, monitors risk”;
- Potential Conflicts of Interest between compensation consultants and their affiliates, and boards of directors, including the provision of additional non-compensation consulting services to the company or its affiliates.
- More Timely Voting Results on Form 8-K: This involves public disclosure of voting results within four business days of the annual meeting or, in cases where elections are contested, within four business days of the definitive final tally. Previous filing requirements allowed several months to pass before election results were known.
The Murninghan Post will continue to track changes in the corporate governance ecosystem – and we invite you to add to our list in the comments section below.
