Tale of the proxies: a turning point: prompted by a newly aggressive government and anger-fueled activist investors, the board-shareholder dynamic takes on new contours.

• Author: Ryan, Michael J.
• Position: PROXY REPORT

THE SEVERITY and rapidly developing nature of last fall's financial crisis seemingly overwhelmed any serious focus on corporate governance as more immediate issues took center stage. In the spring of 2009, with the securities and credit markets seeming to reaching a new--albeit relative--calm, the emphasis was quickly turning, and a renewed focus on corporate governance and proxy voting is emerging. The new administration, new Congress, and new SEC chairman, buoyed by investor anger and a growing demand for change, are poised to bring in a new era of corporate governance and proxy voting reform.

The SEC's full agenda

Within a month of Chairman Mary Schapiro's swearing-in, the SEC began acting on a controversial New York Stock Exchange proposal that had been pending since 2006. Currently, in the absence of specific instructions from their investor clients, brokers can exercise their own discretion in voting for the election of directors. The New York Stock Exchange proposed to eliminate broker discretionary voting for director elections.

Many arguing against the proposal raise the concern that the new rule would make it considerably more difficult for companies to achieve a quorum at annual meetings. These commenters also argue that the Commission needs to conduct a comprehensive reexamination of the entire proxy voting process, not just uninstructed broker voting in isolation. Those in favor of the proposal generally argue that eliminating the broker vote enhances the integrity of proxy voting by, for example, ensuring that the election of directors is determined directly by those holding the economic interest in the company. On July 1, 2009, the SEC approved the proposal, which becomes effective January 1, 2010.

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At a meeting on May 20, 2009, the SEC voted three to two to propose a new rule and rule amendments that, if approved, would provide large shareholders of reporting companies, including investment companies, access to the corporate proxy for the election of directors. A shareholder or shareholder group with the required ownership interest in the company would be entitled to nominate the greater of 25% of the company's board or one nominee. For large accelerated filers, the shareholder or shareholder group would need to own at least 1% of the company's stock; for smaller accelerated filers, the ownership would need to be at least 3%; and for non-accelerated filers, the ownership would need to be at least 5%. The proposal includes a number of other provisions, including that shareholders must have held their shares for at least one year and that the shareholders certify that they are not seeking to change control of the company. The proposal would also impose greater disclosure requirements with regard to the proponent and the nominee(s).

In an April 6,2009, speech before the annual meeting of the Council of Institutional Investors and in a statement issued on June 10, 2009, Chairman Schapiro outlined an aggressive agenda, focused principally on greater disclosure around corporate governance. Several of the initiatives were proposed by the SEC on July 1, including enhancing disclosure concerning the experience, qualifications, and skills of director nominees, and requiring boards to disclose the rationale behind their particular leadership structure--whether that structure includes an independent chair, a non-independent chair, or a combined CEO/chair.

At its July I meeting, the SEC also proposed revisions to aspects of the controversial 2006 Compensation Discussion and Analysis rule. In light of last year's market turmoil and concern that compensation structures promoted excessive and irresponsible risk-taking, Chairman Schapiro has questioned whether the disclosure was achieving the objective of providing shareholders with the most relevant information.

The SEC's increasing focus in this area is not limited to rulemaking. On May 8, 2009, the SEC charged an investment advisor with violating its proxy rules for not...