Preparing for your next annual meeting: time is of the essence. A concerted and well-thought-out campaign to assure high voter response and a comfortable winning margin is essential.

• Author: Lederman, Lawrence
• Position: Annual Meetings

STARTING IN 2003, annual meetings of shareholders will attract extraordinary attention n from institutional investors, shareholder advocacy groups, regulators, the financial news media, and others. Advance preparation and planning will be crucial.

In the wake of recent accounting scandals and alleged improprieties on the part of corporate executives, new laws and regulations have been adopted that require, among other things, corporate CEOs and CFOs to personally stand behind the accuracy of their companies' financial statements. Moreover, many institutional and individual shareholders have seen the value of their investment portfolios shrink dramatically. These developments have caused the spotlight of public opinion and political discourse to be turned brightly on public companies and their managements, which will intensify as the 2003 annual meeting season gets under way.

A successful annual meeting is an opportunity for management to instill investor confidence and enhance its credibility with shareholders. On the other hand, an unsuccessful annual meeting at which management-sponsored candidates and proposals are approved by only slim margins or, much worse, are defeated can signal shareholder discontent and pave the way for a proxy contest and/or hostile takeover activity. This will be particularly true when the company's stock has been performing poorly and its takeover defenses are inadequate. The stakes are now much greater than ever before.

Management's ability to conduct a successful annual meeting, however, has been complicated by a number of recent legislative and regulatory developments. In planning for their upcoming and future annual meetings, officers and directors must be aware of, and decide how to respond to, the following developments.

Director independence

Both the New York Stock Exchange and the Nasdaq Stock Market have proposed new rules aimed at strengthening the corporate governance standards of listed companies and increasing corporate accountability and transparency. Perhaps the most important feature of the proposed new standards is the requirement that a majority of directors of listed companies be "independent" (see sidebar, "The Boundaries of Independence"). According to data compiled recently by the Investor Responsibility Research Center, the boards of as many as 25% of public companies do not comply with this requirement. A large number of companies will therefore need to change their board composition when the proposed rules become effective.

While the new director independence requirements will not likely result in proxy contests involving shareholder-sponsored opposition slates, dissatisfied investors will have the opportunity under the proxy rules to communicate their discontent with each other and to conduct campaigns in which they urge other shareholders to "withhold" their votes from company-nominated slates; in effect, a "no confidence" vote. As a result, technically uncontested elections may turn into full-blown political campaigns.

Sarbanes-Oxley Act of 2002

There are several provisions of the Sarbanes-Oxley Act of 2002 that also will impact the choice of director candidates at future annual meetings and attract institutional shareholder scrutiny. Section 301 of the Act requires all companies with shares listed on a national securities exchange to establish audit committees consisting solely of independent members who cannot, other than in his or her capacity as a member of the board, "accept any consulting, advisory, or other compensatory fee from the issuer ' or be an "affiliated person of the issuer or any subsidiary thereof." The NYSE proposals suggest, but do not require, that an individual should not serve on the audit committees of more than three public companies.

In addition, Section 407 of the Act directs the SEC to adopt rules requiring such companies to disclose whether or not their audit committees include at least one "financial expert" and, if not, the reason why. Public companies that do not want to risk investor backlash from disclosing that they do not have at least one financial expert on their audit committees will want to add such a director in the coming year, if one of their current audit committee members does not qualify.

Clearly, we can expect that it will be even more difficult to identify qualified independent audit committee members, and particularly financial experts, and convince them to serve on public company boards than it will be to find independent directors generally. Because of the sheer time commitment and increased potential for liability, compensation will become an issue. Boards will have to walk a fine line, doing what it takes to attract and fairly compensate qualified audit committee members while not granting pay packages that cause institutional shareholders and others to question the independence of these directors. There is sure to be much debate on this subject as new board compensation packages are disclosed in future proxy statements.

Shareholder approval of equity-based compensation plans

In response to institutional investor concerns, the SEC is expected to approve NYSE and Nasdaq proposals that would extend their shareholder approval requirements to nearly all equity-based compensation plans. Under the new rules, material amendments also will be subject to shareholder...