June 16, 2009

The Floodgates are Now Open: More Governance Legislation

Just when you thought that the Shareholder Bill of Rights Act was the only thing to worry about on the federalized corporate governance front, along comes the “Shareholder Empowerment Act of 2009.” Last Friday, Congressman Gary Peters (D-MI) announced that he had introduced the legislation, which is intended to “expand shareholder rights and give investors a greater voice in overseeing the companies they own.”

This bill is even more wide-ranging than the Shareholder Bill of Rights legislation. The bill would amend the Securities Exchange Act of 1934 to provide:

1. Mandatory majority voting for directors – The SEC would direct the exchanges to adopt listing standards providing that a director nominee in an uncontested election must receive votes in favor from a majority of shareholders, and any nominee running unopposed for re-election would be forced to resign if he or she failed to receive a majority vote.

2. Proxy access – The SEC would be required to adopt rules, applicable beginning with shareholder meetings occurring after January 1, 2010, that would require issuers to “identify and provide security holders with an opportunity to vote on candidates for the board of directors who have been nominated by holders (sic) in the aggregate at least 1 percent of the issuer’s voting securities for at least 2 years prior to a record date established by the issuer for a meeting of security holders.” The SEC’s rules adopted under this provision would specify the information to be provided and would only be applicable when less than a majority is nominated.

3. Uninstructed Broker Votes in Uncontested Elections – This provision would direct the SEC to adopt rules providing that a broker will not be allowed to vote securities in an uncontested election if the beneficial owner has not provided specific instructions. The rule would apply for meetings held on or after January 1, 2010.

4. Independent Chairman – This provision of the bill would require the SEC to direct the exchanges to adopt listing standards mandating that issuers split the Chairman and CEO roles. Further, issuers would be required to provide that, to the extent possible and consistent with the issuer’s status as a public company, the Chairman is independent (under specified standards) and has not previously served as an executive officer.

5. Shareholder Approval of Executive Compensation – This provision would give shareholders an annual, non-binding advisory vote on the compensation packages of senior executives.

6. Independent Compensation Advisers – Under this provision, the SEC would be directed to adopt rules requiring that if a board or compensation committee retains an individual advisor or advisory firm in conjunction with negotiating employment contracts or compensation agreements with the issuer’s executives, the individual adviser and his or her firm must be independent, as prescribed in the bill.

7. Clawbacks of Unearned Pay – The SEC would direct the exchanges to adopt listing standards requiring issuers to have a policy for reviewing unearned bonus payments, incentive payments or equity payments awarded due to “fraud, financial results that require restatement, or some other cause.” The policy would need to require recovery or cancellation of any unearned payments “to the extent it is feasible and practical to do so.”

8. No Severance Agreements for Poor Performance – The SEC would direct the exchanges to adopt listing standards prohibiting the board or compensation committee from entering into agreements providing for severance payments for executives terminated for poor performance.

9. Disclosure of Performance Targets – The SEC would need to adopt rules requiring disclosure of specific performance targets used in compensation plans. In the course of this rulemaking, the SEC would need to “consider methods to improve disclosure in situations when it is claimed that disclosure would result in competitive harm to the issuer.” These methods might include required disclosure of past experience with similar targets, disclosure of inconsistencies between compensation targets and targets set in other contexts, and mandated confidential treatment requests.

There will no doubt be more legislative proposals of this kind. While the bills may not ultimately be adopted as proposed, they will continue to add issues to the debate over what sorts of governance reforms should go forward, and put pressure on the SEC to act with respect to its numerous outstanding rule proposals and contemplated rule proposals. Hat tip to Ted Allen’s RiskMetrics Group Risk & Governance Blog for highlighting this legislation.

How to Plan for CEO (and Other Senior Manager) Succession

Tune into tomorrow’s webcast – How to Plan for CEO (and Other Senior Manager) Succession – to hear Amy Goodman of Gibson Dunn; Holly Gregory of Weil Gotshal; Mark Van Clieaf of MVC Associates; and Mark Nadler of Oliver Wyman Delta talk about one of the most important – but yet the least understood – of governance areas out there.

You can review the Course Materials for this webcast now.

Don’t Sleep on the FASB Codification

The launch of the FASB Accounting Standards Codification is fast approaching on July 1, 2009. The Codification, which will serve as the single source of authoritative, non-government US GAAP, will be effective for interim and annual periods ending after September 15, 2009. Once the Codification is launched, all existing accounting standard documents are superseded, and all other accounting literature not included in the Codification will be considered “nonauthoritative.” For more information, you can check out FASB’s upcoming webcast about the Codification on June 22nd.

Yesterday, the FASB announced that it had issued Statement No. 166, Accounting for Transfers of Financial Assets (which serves and an amendment to FASB Statement No. 140) and Statement No. 167, Amendments to FASB Interpretation No. 46(R). In its announcement, the FASB notes that these standards will change the way issuers account for securitizations and special-purpose entities, and will impact financial institution balance sheets beginning in 2010. It was further noted that the impact of the standards was factored in by banking regulators in the course of conducting their recent “stress tests.”

– Dave Lynn