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26 May. 2010 | Comments (0)

As Congressional leaders prepare to start a three-week process to reconcile the two versions of the financial regulatory reform bills, it dawned on me the gravity of what is about to take place just prior to Independence Day. The governance of U.S. public companies as we know it will start a drastic transition from compliance governance to strategic governance. What that means is that by this time next year most public companies (there may be some exemptions for small businesses) will have to integrate governance issues into business strategy decisions, putting an end to the ineffective compliance exercise that corporate governance oversight had become. That line of thinking reminded me of a January Director Notes, The 2010 Proxy Season: From Compliance Governance to Strategic Governance [Download a copy here, membership required.] written by John Wilcox, chair of Sodali Ltd., where he describes current proxy season as the inauguration of strategic governance. “Although there will continue to be skirmishes on governance compliance, structure, process, and shareholder rights, particularly in markets where standards are lagging, the focus of corporate governance is likely to undergo a transformational expansion to embrace the following issues:
  • Integration of governance decisions with business strategy and performance goals
  • Board oversight of risk management and internal controls
  • Corporate culture, ethics, internal equity, and leadership style set by the CEO and the board
  • Environmental practices, social policy, and the measurement of intangibles
  • The board’s strategic competence in executive remuneration, CEO succession planning, and board self-assessment
  • Quality of disclosure and communication between boards and shareholders.”
Matteo Tonello, director of research for The Conference Board Governance Center and director of the Director Notes series, believes the financial regulatory reform legislation reflects a growing trend. “If signed into law, the governance provisions of these bills will further accelerate and consolidate the process of empowering shareholders that The Conference Board has been documenting in the United States for several years,” he said. Sen. Chris Dodd and Rep. Barney Frank seem to be striving for some form of strategic governance. But that all depends on whether or not the six major corporate governance measures remain in the final bill. As of Tuesday, Ted Allen of RiskMetrics who was attending the Compliance Week annual conference reported in his blog Tuesday that Frank said majority voting in uncontested elections may not be in the final legislation. But Allen reported that Frank said the SEC may be authorized to impose such a requirement after the fact. He also reported that Frank expects proxy access and Say on Pay to appear in the reconciled legislation. At the same time, Frank set a timetable of June 9-25 for the House of Representatives and Senate conference to finalize the bill. As a reminder, here are the six corporate governance measures included in the two versions of the bill:
  • Give shareholders an advisory vote on executive pay
  • Give shareholders proxy access to nominate directors
  • Call for majority vote in uncontested elections (not included in House version)
  • Require companies to disclose chair and CEO structure
  • Establish standards calling for independent compensation consultants
  • Establish clawback language for executive compensation based on inaccurate financial statements.
The significance of those measures in the overall bill, which also would create a consumer financial protection bureau, create a financial risk council and regulate derivatives and hedge funds, has elicited some reaction from many corporate governance experts. In an interview Wednesday, Ken Daly, president and CEO of the National Association of Corporate Directors, told me that of all the governance measures he expects proxy access to have the biggest effect on boards. “It represents a major incursion into the board, and, if not controlled, could cause chaos,” Daly said. “People with a very, very thin agenda might propose things that may not be good for the other investors.” While he believes expanding shareholder rights is “probably a good thing if it allows more communication with the board,” he is wary of the unintended consequences of federal mandates that are designed to be “one size fits all” solutions. A recent blog post by the John L. Weinberg Center for Corporate Governance at the University of Delaware on the passage of the Senate bill focused on the vulnerability of directors who could quickly become “short-termers.” “Corporate board members are about to enter into an increasing short term world, a world where annual pressure on their board seat may be a new reality,” the post on Monday read.  “Will this divert the proper focus of American enterprise from long-term investment and growth?  We certainly hope not.” “Being a long-term director in a short-term world may not be business as usual, but it doesn't have to be the end of the world.  Communication between the company, its directors and shareholders will be even more important than before.  The SEC may need to take another look at Reg FD in this context, to ensure that the Reg's requirements do not prevent a director or a CEO from communicating the information needed to be responsive to an activist shareholder community coming off a big victory, and accustomed to getting what they want and eager to flex new muscles.” Any advice for directors? Daly has some. “Boards need to revisit transparency,” he said. “They should make sure they do everything efficiently. Boards need to look at the end process and make sure they have enough resources to do their [oversight] job.”
  • About the Author:Gary Larkin

    Gary Larkin

    Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…

    Full Bio | More from Gary Larkin

     

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