(Editor’s Note: This post is based on a Gibson, Dunn & Crutcher LLP memorandum by Amy Goodman and Gillian McPhee.)
The current economic and regulatory landscape poses unprecedented challenges for public companies and their boards of directors. They are facing scrutiny from shareholders, Congress, regulators and the public, and new proposals to address the causes of the financial crisis have been emerging on almost a daily basis for over a year now.
Many of these proposals remain under consideration at a time when calendar-year companies are beginning preparations for the 2010 proxy season, complicating the planning process. The uncertainty of the current environment means that, with respect to many issues–such as the SEC’s proxy access proposals–companies and their boards find themselves in a “wait and see” mode. Directors should remain informed during this time as new developments occur, and they should be prepared to respond at an accelerated pace. To assist boards in addressing the potential changes that lie ahead, this memorandum outlines key issues for directors to consider over the coming months.
1. Executive Summary
As discussed in more detail below, as boards prepare for the potential changes that lie ahead, there are a number of key areas to consider. These include:
a. Director Elections. Boards and companies should take a holistic approach to the director election process, considering the potential impact that the loss of broker discretionary votes will have on director elections at the upcoming annual meeting, as well as the effect of majority voting, “notice and access” (also known as “e-proxy”), and expected voting recommendations of the major proxy advisory firms.
b. Executive Compensation Practices and Disclosures. Boards and compensation committees should evaluate their companies’ compensation practices and policies in light of the current environment, including the strong possibility of federal legislation requiring an advisory vote on executive compensation, or “say on pay.” For the 2010 proxy season, new required disclosures are anticipated relating to the risks created by employee compensation plans and the use of compensation consultants. In view of these considerations, companies should assess their compensation disclosures, with particular focus on the Compensation Discussion & Analysis. In addition, boards and compensation committees should be aware of executive compensation practices that institutional investors and proxy advisory firms frown upon (such as tax gross-ups) and those that they advocate, such as “hold-through-retirement” provisions and “clawback” policies.
c. Board Leadership. Boards and companies should expect a continued spotlight on the issue of board leadership in the coming months. In anticipation of new required proxy disclosures about board leadership structure, boards should consider why their current leadership structure is appropriate. At companies that combine the positions of chair and CEO, consideration should be given to what, if any, steps should be taken to enhance the independent leadership of the board. In addition, the board should consider this issue as part of the succession planning process.
d. Risk Oversight. Boards and companies should consider whether the board has the appropriate structure and processes in place for overseeing the major risks facing the company. The board should be comfortable that it understands these risks and how the risks relate to the company’s business and strategy. Boards, and those who advise them, should think carefully about how the board is spending its time and see that the board has adequate time to address critical issues such as strategy and risk.
e. Shareholder Engagement. Boards should be attentive to what their companies are doing to engage shareholders and recognize that, more than in the past, directors may need to play a greater role in reaching out to shareholders. Initiating a dialogue before a major issue arises helps build a relationship so that the company is not approaching a major shareholder for the first time to talk about a critical subject.
f. Shareholder Proposals for the 2010 Proxy Season. For the 2010 proxy season, we expect that shareholder proposals seeking the appointment of an independent chair and proposals seeking an advisory vote on executive compensation will continue to be popular. In addition, executive compensation in general is likely to be a frequent subject of shareholder proposals. Finally, shareholders’ ability to call special meetings and supermajority voting provisions also are likely to be focal points in the next proxy season.
…continue reading: Considerations for Public Company Directors in the Current Environment