Updated Oct. 28, 2010
By a party-line vote of 3-2, the U.S. Securities and Exchange Commission (SEC) on Aug. 25, 2010, approved a final "proxy access" rule that will make it easier for shareholders in public companies to nominate corporate board members. In addition, the SEC released a statement and fact sheet on the rule.
The move is expected to spur shareholder activism, which could impact corporate decisions involving executive pay and perks as well as other matters. The rule's introductory text states that proxy access is meant to address concerns over "whether boards need to be more accountable for their decisions regarding issues such as compensation structures and risk management. A principal way that shareholders can hold boards accountable and influence matters of corporate policy is through the nomination and election of directors."
"One of the announced purposes of proxy access is to enhance shareholders' abilities to hold directors feet to the fire on executive compensation," commented Michael S. Melbinger, the lead partner and global head of law firm Winston & Strawn’s employee benefits and executive compensation practice group.
One purpose of proxy access:
to help shareholders' "hold directors feet
to the fire on executive compensation."
“This is a substantial development," added Paul DeNicola, director of The Conference Board Governance Center and Directors’ Institute, which brings together senior corporate executives from large companies and institutional investors to work for improved corporate governance. “Proxy access [will] provide opportunities to both long-term shareholders as well as investors with a solely short-term focus. As a result, board members need to continue to enhance the ways in which they communicate with their investors—or face the very real consequence of being replaced.”
Under the rule, shareholders will be eligible to have their nominees included in corporate proxy materials alongside the nominees of management if the nominating shareholders:
• Own at least 3 percent of the total voting power of the company's securities that are entitled to be voted on the election of directors at the annual meeting. Shareholders will be able to aggregate holdings to meet this threshold. (Unions—and union-manged pension funds—as well as activist groups have indicated their intention to organize shareholders for this purpose.)
• Have held their shares for at least three years and continue to own at least the required amount of securities through the date of the meeting at which directors are elected.
The SEC's approval of the new measures follows the July 2010 enactment of the "Dodd-Frank" Wall Street Reform and Consumer Protection Act, which provided the SEC with authority to make rules addressing shareholder access to company proxy materials. In addition, the act includes a "say on pay" provision that beginning in 2011 requires, at least once every three years, that a public company’s proxy materials for its annual meeting include a nonbinding resolution seeking shareholder approval of the compensation paid to its named executive officers (see "Executive Compensation, Corporate Governance Changes on Horizon Under the Dodd-Frank Act").
The rule is "one more reason—as if we needed it after Dodd-Frank and 'say on pay'—for compensation committees to conduct a thorough review and discussion of best practices in executive compensation" in the fall of 2010, before proxy season, advised Winston & Strawn's Melbinger.
Support and Opposition
The SEC vote was lauded by some and lamented by others. "The Securities and Exchange Commission has taken an important and historic step in empowering long-term investors," said AFL-CIO President Richard Trumka in a statement from the union. Prior to the vote, the AFL-CIO had called on the SEC to "end the self-perpetuating system that permits incumbent boards to hand-pick director candidates" by adopting strong proxy access rules.
“Universal proxy access is a fundamental shareholder right enjoyed in most developed nations around the world, so we are very happy to see the United States achieve parity on this critical market mechanism,” said Lisa Woll, chief executive of the Social Investment Forum, which advocates for socially responsible investments by businesses.
But Larry Burton, executive director of Business Roundtable, said that the 12,000 publicly traded corporations affected by the SEC's ruling will face added regulatory burdens. "Far from effective reform, this ruling will allow special-interest groups to pursue narrow agendas and exacerbate the market’s short-term focus, adding more uncertainty than workable solutions at a fragile time in our country’s economic recovery," said Burton, whose organization represents CEOs of large U.S. companies.
Changing Shareholder-Board Relations
“Now that the SEC has made its determination on proxy access, it is incumbent on boards and shareholders to understand the implications for their companies,” observed R. William Ide, III, chairman of The Conference Board Governance Center Advisory Board. “However, this action can also be seen as a symptom of the greater need for more meaningful dialogue among companies, shareholders and boards of directors.”
Generally, the proxy access rule will become effective 60 days after its publication in the Federal Register. Application of the new rule to public companies defined by the SEC as "smaller reporting companies" will be deferred for three years.
Stephen Miller is an online editor/manager for SHRM.
SEC Issues Proposed Rules on ‘Say on Pay,’ SHRM Online Legal Issues, October 2010
Executive Compensation, Corporate Governance Changes on Horizon Under the Dodd-Frank Act, SHRM Online Legal Issues, July 2010
Less Freedom to Pay: Executive Comp After Financial Regulatory Reform, SHRM Online Compensation Discipline, July 2010
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