Part Three of Three Parts
President Obama signed the Dodd-Frank Act into law yesterday, capping an extraordinary period of financial and governance reform, stimulated by the collapse of Lehman Brothers 22 months ago. You could call it “the end of the beginning”, as attention now turns to:
- The rulemaking process: the Wall Street Journal calls it “the biggest wave of new federal financial rule-making in three generations”, mandating 243 rulemakings among 11 Federal agencies, including 95 by the SEC, according to the law firm of Davis Polk & Wardwell. The SEC will need to hire 800 people to fulfill these duties, Chairman Mary Schapiro told lawmakers on Tuesday;
- The regulatory process: the SEC continues to churn out new disclosure policies (yesterday there were two: one for investment advisers, the other involving sales fees charged by mutual funds to investors who buy shares through brokers); and
- The advisory process: the work of the SEC’s Investor Advisory Committee continues apace.
These fast-moving developments tend to overshadow results of the 2010 proxy season. Perhaps that’s just as well, because governance proposals received fewer majority votes this year, compared to a high in 2009. According to Therese Doucet and Ted Allen of RiskMetrics Group, “As of June 30, 119 (30.8 percent) of the 386 proposals that went to a vote (and where results are available) garnered majority approval, down from 154 (or 36.6 percent) of the 421 proposals on the ballot during the first six months of 2009.”
One likely explanation: Most of these corporate governance reforms are (or will) be enshrined in new legislation and regulation, reducing the need to address them through the proxy ballot. In fact, one could argue that the inefficiency of proxy voting, with its ad hoc, company-by-company nature, represents a particularly inefficient vehicle for promoting systemic change—unless it’s directed to board elections.
Proposals calling for more shareholder engagement and more alert and accountable corporate boards, such as resolutions calling for an independent board chair, dominated the ballot. Executive compensation issues, including advisory Say-on-Pay proposals, also factored prominently on proxies this season. “Shareholders will have a greater say on CEO pay so they can reward success instead of failure,” Obama said at the Dodd-Frank signing. Perhaps the most contentious of corporate governance topics, executive pay packages, under Dodd-Frank, now require shareholder approval at every annual meeting. This season, according to RiskMetrics, traditional Say-on-Pay” resolutions won 12 majority votes, and a new proposal filed by the Nathan Cummings Foundation seeking an advisory vote on executive pay earned majority approval at Chesapeake Energy. Glass-Lewis, a proxy advisory firm, reports that a majority of shareholders rejected compensation packages at three U.S. firms: Motorola, Occidental Petroleum, and KeyCorp.
Other topics on the 2010 proxy agenda included:
- shareholders’ ability to call special meetings (according to RiskMetrics’ Doucet and Allen, “there were 12 majority votes for proposals seeking the right of 10 percent shareholder groups to call special meetings”);
- their ability to act by written consent (11 proposals received majority votes);
- elimination of supermajority voting requirements;
- CEO succession planning; and
- board diversity.
Prominent corporate governance activist James McRitchie reports on his CorpGov.net blog that Calvert Investments and the Connecticut Retirement Plans and Trust Funds (CRPTF) announced the successful resolution of their joint shareholder proposal on board diversity filed with Netflix, which “finally named its first female director effective July 1.” McRitchie’s post summarizes corporate governance highlights over the past 7 months, which dramatically change the context of future shareholder activism on governance topics. Several streams of government action are driving these changes, including last December’s SEC adoption of a Proxy Disclosure Enhancements, which took effect in February.
Whatever the source, the U.S. landscape for corporate governance is changed forever—even as the need for improvements continues, especially regarding majority voting and the virulence of corporate political spending.
Tomorrow’s Post will map this changing regulatory landscape of corporate governance—and why it matters to everyone.