In our annual missive last year, we wrote about the need to restore trust in our system of corporate governance generally and in relations between boards of directors and shareholders specifically. We continue to be troubled by the tensions that have developed over roles and responsibilities in the corporate governance framework for public companies. The board’s fundamental mandate under state law – to “manage and direct” the operations of the company – is under pressure, facilitated by federal regulation that gives shareholders advisory votes on subjects where they do not have decision rights either under corporate law or charter. Some tensions between boards and shareholders are inherent in our governance system and are healthy. While we are concerned about further escalation, we do not view the current relationship between boards and shareholders as akin to a battle, let alone a revolution, as some media rhetoric about a “shareholder spring” might suggest. However, we do believe that boards and shareholders should work to smooth away excesses on both sides to ensure a framework in which decisions can be made in the best interests of the company and its varied body of shareholders.
Posts Tagged ‘Holly Gregory’
Institutional Shareholder Services Inc. (ISS) and Glass Lewis & Co. have each made several important revisions to their proxy voting policies for the 2013 proxy season. ISS released new and updated FAQs relating to application of ISS proxy voting policies to compensation (including peer groups and realizable pay), board responsiveness to shareholder proposals, hedging and pledging of company stock, and other matters. This post provides guidance to US companies on how to address these policy changes.
This month marked an important milestone in the development of securities law at its newest frontier: social media. For the first time, the Enforcement Division of the U.S. Securities and Exchange Commission (“SEC”) issued a Wells Notice based on a social media communication. This Wells Notice, which notified Netflix, Inc. and its CEO of the Enforcement Division’s intent to recommend an enforcement case to the Commission, demonstrates the potential for liability arising from disclosures by corporate officers through social media. Although the SEC itself uses social media to disclose important information, the agency has yet to offer formal guidance concerning the use of social media to communicate with the investing public. For this reason, the outcome of the SEC’s investigation into Netflix and its CEO’s social media usage will prove instructive to issuers, directors, corporate officers, investors, and members of the securities and white collar bars.
Although discussions continue to be robust about effective corporate governance practices, review of the aspirational governance principles and guidelines issued by influential board, management and investor affiliated associations and pension funds indicates significant areas of agreement. Areas of apparent agreement include, for example, the appropriate voting standard in director elections (majority voting in uncontested elections with a director resignation policy, plurality for contested elections), the need for some form of independent board leadership (whether in the form of an independent chair or lead or presiding director) and the importance of formal board evaluation processes.
The Comparison of Corporate Governance Principles & Guidelines from Weil, Gotshal & Manges LLP highlights the convergence in views about effective governance practices and structures, as well as remaining areas of disagreement, by providing a side-by-side look at suggestions for board structure and practice from influential players in the investor, board and management communities. The Comparison shows a range of structures and practices that are generally acceptable, while reflecting general agreement that “one size does not fit all.”
Concerns about the responsible use of corporate power remain high in the wake of the financial crisis. Although these concerns have been focused primarily on the financial sector, there is spillover to corporations in every industry. Tough economic conditions, slow job growth, political dysfunction and general uncertainties about the future continue to undermine investor confidence and fuel public distrust (with Occupy Wall Street an example). This in turn intensifies the scrutiny of corporate actions and board decisions, and may skew the regulatory environment in which companies compete.
All corporate governance participants – boards, executive officers, shareholders, proxy advisors, regulators and politicians – have both an interest and a role to play in rebuilding trust in the corporations that are the engine of our economy. In our annual reflection, we offer thoughts on how, without the need for regulatory intervention, boards and shareholders can seize the opportunity to rebuild trust and, by doing so, help resolve some of the tensions that are stalling our economic recovery.
On November 17, 2011, Institutional Shareholder Services Inc. (ISS) issued updates to its proxy voting policies applicable to shareholder meetings held on or after February 1, 2012. This Alert summarizes and discusses implications of those updates for US companies. The ISS proxy voting guidelines and the updates are available at http://www.issgovernance.com/policy.
ISS is generally considered the most influential proxy advisor in the US. Recent studies have found that ISS is able to influence shareholder votes by 6% to 20%.  In preparing for 2012 annual meetings, corporate counsel, corporate secretaries, and directors (particularly those serving on compensation or nominating and governance committees) should review the ISS policy updates and consider how the changes may affect ISS’ evaluation of director re-elections, executive compensation matters, and other matters for shareholder vote. Note that for the 2012 proxy season, ISS has identified over 50 circumstances that may support a negative vote recommendation (either “against” or “withhold”) in uncontested director elections.
On November 19, 2010, Institutional Shareholder Services Inc. (ISS) issued updates to its proxy voting policies applicable to shareholder meetings held on or after February 1, 2011. This Alert summarizes and discusses implications of those updates for US companies. The ISS proxy voting guidelines and the new updates are available at http://www.issgovernance.com/policy.
ISS is generally considered the most influential proxy advisor in the US. A recent study found that a negative ISS recommendation in uncontested director elections is correlated with a 20.3% drop in favorable votes by shareholders, a far higher percentage than that of any other proxy advisor.  Other studies have found that ISS is able to influence shareholder votes by 6% to 19%.  For 2011, ISS has identified over 50 circumstances that may cause it to make a negative vote recommendation in uncontested director elections. A summary of these circumstances is included in Appendix A (available here).
The new requirements of the Dodd-Frank Act and current trends in shareholder activism are likely to combine to make the 2011 proxy season unlike any before in terms of the range of matters on which boards will need to elicit shareholder support and the level of shareholder engagement:
- Proxy Access: We expect the SEC to act promptly to give substantial shareholders or shareholder groups the ability to include their nominees for a limited number of board seats in the company’s proxy materials. Interest in access is evidenced by the efforts of some institutional shareholders to create databases of potential director candidates. For calendar year companies, we expect the deadline to submit shareholder nominations for inclusion in company proxy materials to be around year-end, subject to the terms of advance notice bylaws (which may need to be reset when the new rules are adopted).
On April 7, 2010, the United States Sentencing Commission approved significant changes to Chapter 8 of the Federal Sentencing Guidelines, which applies to organizations convicted of criminal offenses. In particular, these amendments affect the requirements for establishing an “effective compliance program” — a means of mitigating institutional punishment in the wake of criminal conduct. Barring rejection or changes from Congress, the amendments take effect automatically on November 1, 2010.
One important change expands an organization’s eligibility for a reduced sentence if it has an effective compliance and ethics program in place at the time an offense occurs. Additional amendments clarify what constitutes an appropriate response to criminal conduct as part of an effective compliance program. And, notably, the Commission rejected controversial proposals regarding independent monitors and document retention policies that some had argued would prevent flexibility in tailoring context-appropriate compliance programs and responses. On balance, the amendments reflect a give-and-take approach designed to encourage better internal and external reporting of suspected criminal conduct as a means of detecting and deterring crime, especially at the executive level.
As the 2010 proxy season nears, we encourage both boards and shareholders to rethink the contours of their relationship. We expect institutional shareholders to have greater influence in director elections this year given the increasing prevalence of majority voting requirements and, for the first time, the absence of discretionary voting by brokers of uninstructed shares. Institutional shareholder power will expand further in 2011 if the SEC moves forward with proxy access rules and Congress enacts legislation mandating majority voting and “say on pay.” In this environment, boards and shareholders will be well served by considering in an open way how this shift in influence should be reflected in changes in behavior.
For boards, the challenge will be to understand the key concerns of the company’s shareholder base and get out ahead on these issues. Boards should also consider whether company disclosures and communications can be improved to better inform shareholders and encourage them to make company-specific decisions through a long-term lens. This will require devoting more attention, resources and creativity to communications and relations with shareholders. Boards that are insensitive to shareholder concerns risk bruising election battles, while providing further inducement for the homogenized governance mandates currently percolating in Washington.