August 27, 2003

With the SRO corporate governance

With the SRO corporate governance proposals likely to be adopted in the near future, we have started posting sample board committee evaluations on, starting with audit committee evaluations.

We have posted the 156-page Breeden MCI report, which I am labeling the “Grand Corporate Governance Experiment” as it recommends a number of mechanisms that have been debated but not tried. A prime example is the concept of the “town hall” website where shareholders can organize to present proposals to management. Here is Breeden’s recommended format:

“The Governance Committee should establish a website that will offer shareholders a “town meeting” forum for discussion of issues of concern. One or more shareholders representing at least 1% of the voting power of the Company should be entitled to place resolutions on the website for consideration of all shareholders, irrespective of whether such resolutions would be deemed appropriate for the Company’s proxy statement (based on considerations of whether such resolutions involve matters of ordinary business or otherwise). The Governance Committee should establish criteria for the times of submission of such resolutions, and the time and manner of recording votes of shareholders regarding any such proposals. Any such proposal that receives a minimum vote to be set by the Governance Committee (such as 20%) should be placed by the Company on its next proxy statement. It should be the general policy of the Company to solicit the views of shareholders on issues of concern to them on an active basis.”

As I recalled with Bill Morley yesterday, this concept is nothing new. The staff had debated over this concept back during the 1998 amendments to Rule 14a-8 and the staff’s July 15th report asks whether “solicitation should be facilitated by electronic means on one or more websites.” George Kobler floated this concept also in “Shareholder Voting over the Internet: A Proposal for Increasing Shareholder Participation in Corporate Governance,” 49 Ala. L.Rev. 673 (Winter 1998) – albeit without any real legal analysis.

As usual, the potential problems with this approach will be more evident once MCI flushes out – if they follow this recommendation – the details left unspoken by Breeden’s recommendation. This framework is potentially quite costly, both in terms of dollars and management’s time. First, there is the technology cost of setting up the website that contains mechanisms to allow voting, etc.

In fact, I believe only the largest companies could operate such a website as it will take quite a bit of time to qualify shareholders and keep tabs on what is being posted and prepare reports for senior management. This easily could lead to the corporate secretary’s department hiring an additional staffer and would burden inhouse securities lawyers with a heavier load.

Management then would need to determine whether to run their own solicitation campaign against these proposals – and how to deal with false and misleading information posted on the website. Without the SEC staff to act as referees, its probably inevitable that proponents would make more false and misleading statements than they already do (and its unclear whether Rule 14a-9 would apply until more details are known). If the company’s website ends up hosting a “spitting match” between a group of proponents and management, this is sure to draw the media’s attention. More to come…