SEC Contemplating Governance Reforms

After enacting reform in the finance and healthcare sectors legislators and regulators have staked out a new battleground.

After enacting reform in the finance and healthcare sectors, legislators and regulators have staked out a new battleground: the antiquated machinery of U.S. corporate governance. Provisions on corporate governance in the Dodd-Frank Wall Street Reform and Consumer Protection Act, together with a new concept paper on corporate governance mechanics recently issued by the SEC, signal a broad re-exami­nation of the role of the shareholder in U.S. corporations. 

It is not surprising that policy-mak­er soul searching over the causes of the financial crisis has turned to corporate governance. While the credit ratings industry and corporate leveraging practices have much to answer for in the catastrophes of 2007 and 2008, the structure of shareholder-management relations in the United States may have played a significant role in exacerbating the strife in the markets. 

The Dodd-Frank Act contains several significant measures aimed at increasing shareholder participation in key areas of corporate decision-making, especially in connection with compensation of top executives. Dodd-Frank grants shareholders the right to a periodic non-binding advisory vote on compensation payable to named executive officers as described in the proxy statement. Shareholders are permitted a similar vote on compensation payable to named executive officers in connection with change-in-control transactions, unless such arrangements have previously been subject to a say-on-pay vote. 

Moreover, the statute contains pro-visions giving institutional investors an incentive to actually exercise their new rights to participate in decision-making. Under the new rules, institutional investors are required to report at least annually how they voted on any shareholder say-on-pay or golden parachute proposals, unless their vote is otherwise required to be publicly reported. 

While some question whether there are real teeth in non-binding say-on-pay resolutions, experience with executive compensation votes at Motorola and Occidental Petroleum has shown that many boards are reluctant to override the will of shareholders on such a sensitive topic. 

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