I decided to chat with Charles Elson, the Edgar S. Woolard, Jr., chair of the John L. Weinberg Center for Corporate Governance at the University of Delaware. Our topic: the Top 5 corporate governance issues for 2010.
Elson, who is also a director on various boards, of counsel with Holland & Knight and a member of the Technical Advisory Group of The Conference Board Task Force on Executive Compensation, believes that before all is said and done politicians and regulators will dictate how corporate governance is carried out in the next year.
“Regulations and laws will affect all of the top corporate governance issues in 2010 substantially,” Elson said. “God knows it is a mess. This is one of the most volatile, mind-numbing points in corporate governance that I have ever seen.”
For the most recent update on fiduciaries’ responsibilities with respect to these issues, as usual I direct you to The Conference Board Corporate Governance Handbook: Legal Standards and Board Practices (Third Edition).
Below is his list of the Top 5 corporate governance issues for 2010 as well as some additional reference points on each issue:
1.) Government shareownership
: I think the government as a shareholder has different goals than regular shareholders. It has political objectives. And we know politics and economics don’t mix. It impacts how a company is run and how its stock is voted. Unfortunately, the rights of other shareholders will be secondary. Many of those shareholders would just move their capital somewhere else.
Governance Center Blog: Such an unprecedented ownership of public companies by the federal government (i.e. AIG, General Motors and Chrysler) has proven problematic for those boards as the Obama administration has begun to make decisions such as limiting executive compensation and bonuses at the companies that have accepted bailout funds. In the case of General Motors, the influence of the government led to the resignation of the CEO.
2.) Proxy reimbursement
: It is much more effective than simply granting shareholder proxy access. Access only works if you have the money. It’s a more credible method for viable director elections.
Governance Center Blog: While the SEC proposed rule on shareholder director nominations would call for more direct access to the proxy for the purpose of putting their own candidates up for election, it does not address the reimbursement of expenses for proxy contests. However, the state of Delaware in April amended its general corporation laws to allow for companies on a conditional basis to adopt bylaw provisions to reimburse shareholders who have incurred costs related to solicitation of proxies for director elections. Some of those conditions include the number or proportion of directors nominated by the shareholder seeking the reimbursement, whether the shareholder has sought reimbursement before and limiting the reimbursement based on the proportion of votes cast in favor of one or more directors nominated by the shareholder or the amount spent by the company soliciting proxies for the election. (See Latham & Watkins Commentary.)
3.) Proxy access
: This has more appeal, but ultimately it is problematic because of the money. It just simply gets someone on the ballot. Putting someone on a proxy is just a tenth of the cost of actually getting someone elected. It only covers the printing and mailing costs. The real expense is the campaign. In a lot of cases, you get what you pay for.
Governance Center Blog: The SEC’s proposed rule, 14a-11, and amendments to Rule 14a-8(i)(8) would require companies, under certain circumstances, to include shareholder nominees for director in the annual proxy statement. The amendment would change the election exclusion provision, which would reverse a 2007 SEC rule amendment. As part of the public comment period, which ended Aug. 17, many letter writers opposed to Rule 14a-11 called for “private ordering” or allowing each company to determine if it should allow shareholders to decide which proxy access is desirable. (See The Corporate Library report by Beth Young, a senior research associate.) The two forms of access are opting in, where the default rule is no proxy access but that a company could opt in by adopting a bylaw, and opting out, where the default rule is proxy access and a company could opt out by adopting a bylaw.
4.) Executive compensation:
Government involvement, ala the pay czar, I feel will be highly problematic because it should be up to the board, not a third party.
Governance Center Blog: While the U.S. Congress toys with the idea of regulating executive compensation at companies that take excessive risks, the U.S. Federal Reserve plans to oversee the executive pay policies of the banks under its aegis and the Treasury’s appointed special pay master announced in October that he was cutting the pay of the top executives of largest TARP recipients. However, it’s the actions by the G-20 nations that has gotten the most worldwide attention. The G-20 Summit Financial Stability Board Principles for Sound Compensation Practices spells out five principles that are similar to The Conference Board Task Force on Executive Compensation executive compensation principles. (For a comparison of the two, click here) In addition to the G-20 and The Conference Board principles, there are SIFMA’s Guidelines on Executive Compensation and the Independent Directors Executive Compensation Project (IDEC) principles. In the United Kingdom, the HM Treasury announced shortly after the G-20 Sept. 25 release of the compensation principles that the top five banks in that country – Barclays, HSBC, Lloyds, RBS and Standard Chartered – had agreed to implement the G-20 reforms effective Jan. 1, 2010.
5.) Say on Pay:
This is one that has populist appeal, but it will be ineffective in the end. Say on Pay ultimately arms the shareholders, but it limits the power of the board. That troubles me. It is up to the board to oversee executive pay. The board is the best monitor for management. Compensation is the best monitor for the board. And ultimately, Say on Pay weakens the board by putting the power of compensation oversight in the hands of the shareholders.
Governance Center Blog: Of all the top issues listed here by Elson, this one probably has the best chance of being in place sometime next year (maybe not in time for the 2010 proxy season). The Obama administration, House Financial Services Committee Chair Barney Frank and Senate Banking Committee Chair Chris Dodd are in lock step on Say on Pay. Also, SEC Chair Mary Schapiro fully supports a non-binding advisory vote on executive compensation.
Heading into the first full post-financial crisis proxy season that will most likely include a bevy of new corporate governance regulations,
[caption id="attachment_187" align="alignright" width="150" caption="Charles Elson, Chair of Weinberg Center for Corporate Governance, University of Delaware"]