Securities and Exchange Commission Chairman Mary Shapiro set out governance-related portions of the agency’s 2009 regulatory agenda in an April 6 speech. The agenda includes proposals for new regulations which would have significant impact on public companies. Key elements of the SEC’s rulemaking agenda are set forth below.
The SEC in May will consider a proposal requiring that stockholders have a meaningful opportunity to nominate directors. The SEC considered proxy access proposals in 2003 and 2007 but nothing was adopted. The most recent SEC proposal would allow a group of stockholders owning 5% or more of a company’s voting shares to include in the company’s proxy materials a proposal for an amendment to the company’s bylaws that would mandate procedures to allow shareholders to nominate board of director candidates.
Delaware Law Proposal
The SEC indicated that it would consider pending Delaware law proposals in connection with proxy access rulemaking.
Delaware is considering proposed amendments to the Delaware General Corporation Law with a proposed effective date of August 2009. One amendment would permit the adoption of a bylaw providing stockholder access to the company’s proxy statement for the purpose of director elections. The proposal would permit the imposition of conditions on access, such as minimum stock ownership requirements, limitations on the proportion of directors nominated, and precluding nominations from persons who have acquired a specified percentage of the voting power of the corporation within a specified time period before the director election.
Delaware is also considering a second amendment which would permit the adoption of a bylaw to require the company to reimburse stockholders for expenses incurred in connection with their solicitation of proxies for director elections. The company could impose reasonable conditions for eligibility on such reimbursement.
Bylaws permitted by the new legislation could be proposed and adopted by stockholders or by corporate directors.
The SEC proxy access discussions are also impacted by the pending proposed change to New York Stock Exchange Rule 452.
Under current NYSE and SEC rules, brokers must deliver proxy materials to beneficial owners in advance of the stockholder meeting. Rule 452 permits brokers to exercise discretionary voting authority if no voting instructions have been received by the tenth day preceding the stockholder meeting; however, this discretionary voting only applies to “routine” matters.
The NYSE has long considered uncontested director elections to be a routine matter. The NYSE submitted to the SEC in February 2009 a proposal to amend Rule 452 to provide that the election of directors is not a routine matter. The public comment period for the proposed rule has expired. The amended rule, if approved by the SEC, would be applicable to proxy voting for stockholder meetings held beginning in 2010.
The NYSE proposed rule could have a significant impact in cases where an activist launches a “vote no” vote campaign since the inability of brokers to vote retail holder shares would enhance the impact of institutional investors. The inability of brokers to vote on a discretionary basis in uncontested director elections would also increase the influence of the voting recommendations of proxy advisory firms such as RiskMetrics Group (formerly ISS).
Director Related Disclosures
The SEC will consider in June enhanced disclosure concerning director nominee experience, qualifications and skills. The current rules require a brief description of a candidate’s business experience over the past five years. The SEC chairman does not believe such description is sufficient in today’s complex business environment.
The SEC will also consider in June whether boards should disclose to stockholders the reasons for choosing a particular leadership structure — whether that structure includes an independent chair, a non-independent chair, or a combined CEO / chair.
The SEC is developing rule proposals to address how a company and its board of directors manage risks. The SEC chairman highlighted principles calling for effective alignment of compensation with prudent risk-taking and effective supervisory oversight by stockholders. The SEC will propose rules requiring fuller disclosure of how compensation structures and practices drive an executive’s risk-taking in connection with compensation rulemaking. The SEC will also consider whether greater disclosure is needed about a company’s overall compensation approach, beyond the currently required discussion relating to the highest paid officers.
Chairman Shapiro’s speech referenced several times her belief that the SEC “is the investor’s advocate.” The SEC’s proposed rulemaking over the next several months is designed to advocate investor concerns about access to director election processes, director governance information, and compensation as it relates to risk-taking. The final SEC rules are likely to have a significant impact on the governance of public companies.