October 30, 2006

Bank of America Tries a Different Majority Vote Approach

Check out this recent Form 8-K filed by Bank of America regarding their board’s adoption of by-law amendments and governance guidelines to implement majority voting for directors. The points that you may find of interest are the bylaw provision cannot be amended without shareholder approval and the governance guidelines with respect to director resignation, which are different from those that have been adopted by most companies (e.g. directors must agree to submit resignation in advance of next annual meeting). Here is the related press release – and the amended corporate governance guidelines.

Ken Wagner of Bank of America has just joined the webcast panel – “Shareholder Access and By-Law Amendments: What to Expect Now” – to explain why his company took the approach that it did.

Stocks Populi

With the SEC’s re-consideration of its outstanding shareholder access proposal on December 13th, reports of heated debates within the SEC regarding “what to propose” are not surprising – here is former SEC Chairman Arthur Levitt’s opinion on the topic from Friday’s WSJ:

“Ever since the recount of 2000, partisans of both parties have paid particular attention to everything from who votes to how they vote and how their preferences are recorded. Counting every vote is not only integral to our political life; it is central to our economic life as well. Shareholder capitalism enables our markets to thrive, our companies to grow and our economy to remain strong. And central to this system is the principle that shareholders can have a voice in the running of the companies that they own, that their votes will count.

This fall, the issue has been the focus of a series of court cases, decisions and now potential Securities and Exchange Commission action. How the SEC handles this can have a profound effect on the future of shareholder democracy, corporate governance and the future of our markets. It’s a matter of interest to all investors.

For years, shareholder advocates have been working to gain better access to companies’ proxies so that they can put forward resolutions and, most importantly, their own candidates for director slots. Even though boards of directors have improved considerably since the passage of new independence standards and disclosure requirements in Sarbanes-Oxley, the ability of shareholders to remove directors is critical when seeking to revive a moribund corporation. Yet currently, board elections are one-party affairs, with the incumbent board’s choices winning in virtually every case. Shareholders can only put forward candidates after costly proxy campaigns. A director has a better chance of being struck by lightning than losing an election.

After failing to convince the SEC to pass a proxy access proposal in 2003, shareholder advocates tried to make changes in the bylaws of companies that govern the elections of directors in order to make them fairer. They argued that this was a matter of process under applicable law (that is, did not directly relate to the election of directors, a basis of exclusion), and thus management had to put such a proposal on its proxy card to shareholders. In September, in a case concerning AFSCME, the large public employee union that wanted to put forward these changes at AIG, an appeals court ruled that such a bylaw change was proper and that management would have to open its proxy to proposals regarding how directors were elected. (Full disclosure: I was retained by AIG’s board to help restructure its corporate governance; I had no involvement in this matter.)

In response, the SEC rightly decided to re-examine this issue and clarify the law. An open hearing on the topic was scheduled in October but was delayed until Dec. 13. The outcome of this session is critical to the future of shareholder capitalism. The signal the commission sends is an important one. Support of the AIG decision will make it clear that the reforms of the past few years were not ephemeral, and that even though the markets are once again delivering high returns, the commitment to good governance will not falter.

The upcoming meeting is the right time and place for the commission to set expectations for our public corporations. Indeed, an understandable desire for consensus on such a difficult matter is less important than the clarity of the SEC’s message. While passing an entirely developed proxy access plan may be too much to ask, the SEC can set a direction by making it clear that it will not ignore the issue of fairness that precipitated this latest litigation and put forward a series of steps that will strengthen shareholder democracy.

Part of this should include safeguards such as a minimum requirement of shares held in order to put forward director nominees. Other changes that can be made are: an increase in the number of exempt solicitations from 10 persons to 20 as long as those solicited are institutions or “accredited investors” so that investors can easily communicate with each other; the electronic transmission of proxy materials to those who desire them in that form, a move that can boost shareholder participation and reduce cost; and an endorsement of the principle of majority rule and schemes that bring this to publicly traded companies. A growing number of corporations have taken this last step, and it’s important for the SEC not only to allow but also to affirmatively promote it as a best practice — even urging the exchanges to include majority-voting among their listing standards.

By setting this tone, the SEC will make a strong statement about corporate governance. It will demonstrate that accountability is a principle that will not be compromised. It will bolster its admirable efforts on executive compensation; after all, disclosure provisions are toothless if shareholders are unable to act upon them. And an endorsement of shareholder democracy will show investors world-wide that in our markets, their voices matter and their votes count.”

Sign On The Dotted Line

From “The Rule 10b-5 Daily Blog“: Sarbanes-Oxley requires the chief executive officer and chief financial officer of a company to certify the accuracy of each periodic report containing financial statements. Plaintiffs often argue that these certifications can support the pleading of scienter (i.e., fraudulent intent) in cases alleging accounting misrepresentations.

In what appears to be the first circuit court opinion to address the issue, the U.S. Court of Appeals for the Eleventh Circuit has held that SOX certifications, by themselves, are not indicative of scienter. In Garfield v. NDC Health Corp., 2006 WL 2883238 (11th Cir. Oct. 12, 2006), the court found that SOX “does not indicate any intent to change the requirements for pleading scienter set forth in the PSLRA [Private Securities Litigation Reform Act of 1995].” Accordingly, a SOX certification “is only probative of scienter if the person signing the certification was severely reckless in certifying the accuracy of the financial statements.”

Quote of note: “If we were to accept [plaintiff’s] proferred interpretation of Sarbanes-Oxley, scienter would be established in every case were there was an accounting error or auditing mistake made by a publicly traded company, thereby eviscerating the pleading requirements for scienter set forth in the PSLRA.”