Pregaming the Proxy Season: Will It Finally Matter This Year?

Say what you will about the financial crisis, but it certainly will make the this proxy season interesting.

Many of the corporate-governance issues of the past decade, such as say-on-pay and proxy access, have gained greater traction in the wake of the worst economic downturn in since the Great Depression. The U.S. government has put executive compensation under increased scrutiny; the SEC is requiring increased disclosure on the relationship between risk and a company’s compensation practices; while shareholders are putting forth a greater number of proposals.

And as interesting as this year is likely to be, next year may well be more so. To sort through the all the issues and new rules facing boards, Deal Journal turned to Samuel Wolff, a partner at law firm Akin Gump Strauss Hauer & Feld.

Deal Journal: What impact is the financial crisis having on boards?
Samuel Wolff: This year we have the convergence of pressure by activist and institutional investors, public scrutiny of executive compensation, Congressional hearings and legislation, and new SEC regulations. These activities and trends are not necessarily new, but are increasing in intensity and interacting with each other–largely in response to the financial crisis–to a degree we have not seen before. These forces are converging and will put pressure on corporate boards.

DJ: Executive compensation has been a hot-button issue for many years. How has the financial crisis impacted the discussions within the corporate boardroom?
Wolff: The financial crisis has caused the government to focus on the relationship between compensation and risk. SEC rule changes are requiring companies–and not just financial firms–to look more closely at that relationship. The focus on risk is not a new thing. What is different is the focus on the relationship between risk and compensation. Boards and compensation committees are now looking more closely at whether their compensation practices incentivize inappropriate risk-taking.

Executive compensation has increasingly been under fire over recent years. The financial crisis has accelerated pressure on corporate boards in this area. Say-on-pay is a very important issue that has been given momentum by the financial crisis and that is increasingly on board’s radar screens. The crisis has also caused regulators to think about the role of compensation committees and compensation consultants.

DJ: Say-on-pay and proxy access have received a lot of attention, but have yet to go into effect. What impact are these potential rules having on corporate boards?
Wolff: There are few companies that have instituted say-on-pay provisions outside of TARP. A handful of companies have followed an alternative approach and provided biennial or triennial say-on-pay. I don’t think that’s the way the law is heading and generally, I think companies are waiting to see what’s going to happen with say-on-pay in Congress. It’s a fluid situation right now. It’s straightforward in the House but the fate of the legislation in the Senate is unclear; the Banking Committee has not marked up its bill yet. Right now it unclear how it’s going to come out on the Hill; but if there is a financial reform law it would not be surprising at all if it includes say-on-pay.

Say-on-pay is probably the most common shareholder proposal, so boards will also be feeling some pressure from shareholders on this issue.

DJ: What about proxy access?
Wolff: Proxy access is a major rule proposal; if adopted it will be a major change in U.S. securities law. The focus to date has been on having input into the SEC’s regulations through the comment process. The comment period as extended just ended last month.

If the rules are adopted as proposed, public companies generally are not going to be too happy about them. Many companies think the share ownership requirement (one percent for large accelerated filers) is too low, and the holding period (one year) too short. There is some sentiment that the shareholder ownership position should be unhedged. More generally, many companies think the government should allow some type of “private ordering,” through which companies with shareholder approval can design their own systems or even opt out.

DJ: What rule change that has gone into effect this year is likely to have big impact this year?
Wolff: One of the biggest changes is an amendment to a New York Stock Exchange rule. The change eliminated broker discretionary voting in uncontested director elections. This affects all public companies, not just NYSE companies. Prior to this year, brokers were allowed to vote uninstructed shares in uncontested director elections–in other words, where investors didn’t tell the broker how to vote. More often than not, these shares were voted in favor of the board’s nominees. The SEC approved the rule change so that brokers no longer have discretion to vote uninstructed shares in director elections. That is a large percentage of the votes–I’ve seen estimates of about 20%. For companies that have majority vote requirements, it will be harder to get to a majority.

Go to Source