Without question, the role of public company boards and their corporate governance policies and practices continue to face intense scrutiny. That much of this scrutiny comes from shareholder activists and institutional investors comes as no surprise. Demands from these shareholders for greater “shareholder democracy” and involvement in corporate governance have been growing in line with the remarkable increases in the size of institutional investors’ portfolios over recent decades. Pressures brought by investors on corporate governance practices and policies have become even more acute in the last three years.
What is surprising, however, is the unprecedented level of scrutiny on corporate governance issues that the federal government has recently shown. Shortly before publication of this year’s Survey, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Reform Act”) was signed into law by President Obama. This long-anticipated legislation supersedes Senator Dodd’s bill, introduced in November 2009 and passed by the Senate in March 2010 and entitled the “Restoring American Financial Stability Act,” Representative Frank’s bill, introduced in the House of Representatives and passed in December 2009 and entitled “The Wall Street Reform and Consumer Protection Act of 2009,” as well as the broad governance directives contained in Senator Schumer’s earlier “Shareholder Bill of Rights Act.” The Reform Act focuses primarily on the financial industry but includes provisions relating to corporate governance that represent an extraordinary foray by the federal government into the corporate governance arena.
When added to an ever-changing regulatory framework, the pressures brought to bear on corporate governance practices and policies by shareholders and legislative action have caused and continue to cause significant evolution in the corporate governance landscape. This is our eighth Annual Survey of Selected Corporate Governance Practices of the Largest US Public Companies (the “Survey”). This year’s Survey provides the most current summary of where we are in that evolution.
In addition to the legislative reforms that have taken shape over the past year, there has continued to be speculation over the enactment by the Securities and Exchange Commission (the “SEC”) of its proposal to amend the proxy rules to grant shareholders access to companies’ proxy statements. The SEC initially proposed the proxy access rules in May 2009, and many assumed that the rules would be in effect in time for the 2010 proxy season. In October 2009, however, after receiving numerous comment letters and questions regarding its authority to issue proxy access rules, the SEC postponed the adoption of the rules.
While the Senate bill introduced in 2009 required the SEC to adopt proxy access rules within 180 days after enactment of the bill, the Reform Act enables, but does not require, the SEC to implement proxy access rules. This change may not end up having much practical effect, as the SEC has continued to signal that it intends to move ahead in adopting proxy access rules. Now that the Reform Act provides the SEC with explicit authority to do so, the SEC is expected to revisit proxy access this year so that the rules would be in effect in some form for the 2011 proxy season.
Proxy System Review
Just a few days before the Reform Act was signed into law, the SEC issued a “concept release” to commence its first review of the proxy voting infrastructure in nearly three decades. The release requests public comment on many aspects of proxy voting, from whether there is merit to incorporating current technologies into the proxy voting process (e.g., making proxy statement information and voting information interactive, so that it can be retrieved, searched and analyzed using automated tools), to whether proxy advisory firms should be subject to enhanced regulatory oversight. The SEC also requested comment on the scope and significance of “empty voting,” which occurs when a shareholder exercises voting rights that exceed its economic interest in a company’s shares. Given the significant workload at the SEC relating to the implementation of the Reform Act, it is unclear whether the SEC will implement any changes to the proxy system before next year’s proxy season.
Of the Top 100 Companies,  82 have implemented some form of majority voting in uncontested director elections, up from 75 last year. Both the 2009 and 2010 versions of Senator Dodd’s bill required listing exchanges to impose majority voting standards for all listed companies in uncontested elections, which may explain why only two of the 18 Top 100 Companies that have not implemented majority voting received a shareholder proposal to do so during the 2010 proxy season. The Reform Act, however, does not include the majority voting provision. As a result, it is likely that majority voting will receive a great deal of focus from shareholders and advocacy groups in the coming years. As was the case in 2009, no director standing for reelection at one of the Top 100 Companies failed to receive majority support in 2010.
Of the 82 companies that have implemented majority voting, 75 address (through corporate governance guidelines, majority voting policies or organizational documents) what happens if a director receives more votes against than votes for his or her election. Seventy-three of those 75 companies have adopted mandatory resignation policies, with various approaches to the manner in which a decision whether to accept a resignation is made. The remaining two of those 75 companies have adopted policies that the director’s term automatically expires after 90 days.
Company and Board Leadership
Since our last Survey, the SEC has announced a change to the analytical framework that it uses to determine whether shareholder proposals relating to CEO succession are properly excludable from a company’s proxy statement under Rule 14a-8. Contrary to prior policy, the SEC has now determined that CEO succession planning transcends day-to-day business matters and constitutes a significant factor in a company’s corporate governance policymaking. On that basis, companies may no longer rely on the “ordinary business” provision under Rule 14a-8 to exclude shareholder proposals regarding CEO succession. Perhaps due to the fact that the SEC announced this change in October 2009, at which point it was too late for shareholders of many of the Top 100 Companies to submit proposals under Rule 14a-8, only three of the Top 100 Companies included in their proxy statements shareholder proposals regarding CEO succession planning.
With respect to board leadership, the Reform Act requires the SEC to issue rules within 180 days of enactment requiring every public company to disclose the reasons why it has determined to combine or separate the chair of the board and CEO positions. Current SEC rules (implemented in 2009 for proxy statements filed after February 28, 2010) already require that companies disclose why they have determined that their leadership structure is appropriate, so as a practical matter the Reform Act is not likely to result in significant additional disclosure. Of the Top 100 Companies, 80 were subject to this disclosure requirement this year.
As noted in this year’s Survey, 30 of the Top 100 Companies split the chair of the board and CEO positions, and the reason often given for doing so is that the responsibilities of the two offices are different. Of the 70 Top 100 Companies that combine the chair of the board and CEO positions, many cite the efficiencies that are gained by having one individual hold both offices.
As part of the rules implemented in 2009 for proxy statements filed after February 28, 2010, the SEC approved enhanced disclosure requirements regarding risk oversight, including with respect to the relationship of a company’s compensation policies and practices to risk management and the board’s role in risk oversight. Of the Top 100 Companies, 80 were required to comply with the new rules during the 2010 proxy season, and nine of the remaining 20 companies also included disclosure about risk oversight in their 2010 proxy statements. This year’s Survey summarizes the variety of approaches that these companies have taken in disclosing the manner in which their boards administer the risk oversight function.
In addition, as with CEO succession planning, since our last Survey, the SEC has determined that companies may not exclude proposals relating to an evaluation of risk if “the underlying subject matter transcends the day-to-day business matters of the company and raises policy issues so significant that it would be appropriate for a shareholder vote” and there is a sufficient nexus between the subject of the proposal and the company. During the 2010 proxy season, none of the Top 100 Companies included in their proxy statements shareholder proposals regarding evaluations of risk, perhaps again due to the fact that the SEC announced this change in its analytical framework in October 2009, at which point it was too late for shareholders of many of the Top 100 Companies to submit proposals relating to risk evaluation under Rule 14a-8.
On the legislative front, in the process of reconciling the House and Senate bills that led to the Reform Act, proposals that required boards of directors to form risk committees were not included in the final legislation.
The 2009 proxy season was an extremely active one in terms of proxy contests and shareholder proposals. While the 2010 season has been a quieter one with respect to dissident activity, 54 of the Top 100 Companies nonetheless included corporate governance-related shareholder proposals in their proxy statements, as compared to 55 of the Top 100 Companies in 2009. The 2010 proxy season saw continued focus by shareholders on proposals related to shareholders’ power to call special meetings (included by 24 of the Top 100 Companies) and independent board chairs (included by 18 of the Top 100 Companies). In light of the fact that the Reform Act does not include a majority voting requirement with respect to uncontested elections, it is likely that majority voting will receive a great deal of attention during the 2011 proxy season.
Last year, the SEC voted to approve amendments to NYSE Rule 452 to make the election of directors a “non-routine” matter. The result of this rule change was that brokers are no longer able to vote on the election of directors without specific voting instructions from beneficial owners of shares, whether the election is contested or uncontested. (Under the former NYSE Rule 452, if beneficial owners did not provide their brokers with specific voting instructions, brokers could vote on behalf of such beneficial owners on all “routine” matters, which included the election of directors.)
This year’s proxy season was the first in which we were able to begin to see the impact that this change to Rule 452 had on director elections. In the US, a significant amount of retail holdings is held through brokerage accounts, and brokers have typically voted in support of management. For these reasons, many predicted that, without broker discretionary voting, “vote no” campaigns would be more effective and the impact of the rule change could be significant. In actuality, no director of any of the Top 100 Companies failed to obtain a favorable vote of a majority of the votes cast in 2010. While it is difficult to measure the impact of the rule change, it appears that the change to the rule has not, to date, had the negative impact that some had feared.
The complete survey is available here.
 See “Survey Methodology” on page 46 of this Survey for the list of the Top 100 Companies.