Opening keynote 2010: a governance odyssey; Hart and Wallenstein's annual update on the legal environment for directors.

• Author: Hart, Robert M.

Since the enactment of SOX, an increasingly punitive and hostile environment toward public companies has developed, an environment which recently has been exacerbated by the most severe financial crisis since the Great Depression, a massive recession, high unemployment, federal bailouts and large bonuses paid to employees of the recipient's of such bailouts. We'll see some of the results of this in new regulations for the 2010 proxy season.

Directors need to recognize that regardless of whether the failure of capitalism was attributable to deficient government policy and regulation or to greedy capitalists, stockholders have been hit hard by actions and inactions of boards of directors, managements, regulators and the government. Not surprisingly, regulatory focus has been aimed at the role and functioning of the boards of public companies. Unfortunately, reflecting policymakers' lack of understanding of how boards function and how state corporate laws work, many of the proposed regulations will only serve to further bureaucratize the board and its committees and displace the historic private ordering corporate governance model with a government mandated model.

Where are we and where are we heading?

Since President Obama's inauguration we have seen an unprecedented volume of Federal regulatory and legislative actions and initiatives regarding such issues as executive compensation, risk management, "say on pay," shareholder nominations of directors, compensation committee independence, broker discretionary voting for directors and the separation of the CEO and Chairman roles. These and related matters threaten a Federal takeover of corporate governance.

Of particular note:

1. The House of Representatives passed the "Corporate Financial Institution Compensation Fairness Act of 2009," H.R. 3269, which would give shareholders a non-binding vote on executive compensation and golden parachutes, impose enhanced independence requirements on compensation committees, impose independence requirements on the compensation committee's consultants, and require Federal regulators to adopt rules for "covered financial institutions" restricting incentive-based compensation arrangements that "encourage inappropriate risks. ..."

2. The SEC proposed rules that would require new disclosures in the proxy statement regarding the qualifications and experience of directors and executive officers, the company's overall compensation program as it relates to the...