The landscape of corporate governance could change drastically in the 2010
proxy season. The NYSE has already made changes to its broker discretionary
voting rules. The SEC has proposed rules addressing proxy
access, executive compensation and corporate governance disclosures.
Congress also has one bill that was introduced in the Senate
and two bills in the U.S. House, one of which has already
passed and been sent to the Senate that deals with corporate governance topics.
In the next few months, companies should start thinking about how they will
respond to these various proposals if they become law. Below is our top 10 list
of what you can do now to begin preparing for the 2010 proxy season.
1. Assess Your Current Corporate Governance Profile
The proposed legislation is seeking to mandate a so-called “best practices”
governance profile by making changes (1) to make majority voting mandatory in
uncontested director elections; (2) to separate the positions of CEO and
chairman of the board; and (3) to require companies to declassify their boards.
Companies should assess to what extent their profile measures up to the best
practices profile, and consider what changes would need to be made in these
areas if the legislation passes as proposed. Companies should also determine if
they would like to make changes even if these practices do not become mandatory.
All of them are favored by the institutional shareholder advisory firms, such as
2. Evaluate Your Current Leadership Structure
The SEC proposals seek to require proxy statement disclosures relating to the
leadership structure of companies. In particular, each company would be required
to explain why the leadership structure in place at the time of filing is best
for the company, including why the principal executive officer and board chair
positions are combined or separate. In addition, each company would be required
to disclose whether it has a lead independent director and the role the lead
independent director plays in the company’s leadership.
While no particular leadership structure is mandated by the SEC’s proposed
disclosure rules, the simplest way to avoid making disclosures that may be
negatively perceived is to adopt the implicitly recommended structure.
Governance committees should begin discussing now what disclosures would be made
in the 2010 proxy statement and whether any changes may be appropriate before
the disclosures are required.
3. Review the Qualifications of Your Directors
The SEC proposals would also require expanded disclosure about incumbent
directors and director nominees. The new disclosure would focus on the specific
experience, skills and qualifications that qualify an individual to serve as a
director for the company and on any committee. In addition, there would be
longer look-back periods for disclosure of other directorships and legal
Companies need to update and expand their diligence files on each director’s
(and nominee’s) qualifications and experience. Companies should determine how
this information should be gathered, i.e., expanded director and officer
questionnaires, separate questionnaires, etc. Nominating committees should also
start reviewing directors’ qualifications to serve on the board and on their
committees, and consider whether it may be appropriate to make reassignments or
provide additional training in areas of focus for committee members.
4. Examine the Independence of Your Compensation Committee Members
Under the proposed congressional legislation, all compensation committee
members would need to meet independence requirements similar to those that apply
to audit committee members. This means that compensation committee members would
not be able to – other than in their capacity as a board member or committee
member – accept any consulting, advisory or other compensatory fee from the
As applied to audit committees, the rule prohibits both direct and indirect
payments, meaning that payments made by the company to the director’s firm,
rather than to the director individually, may also be a disqualifier. If current
members of a company’s compensation committee do not currently meet audit
committee independence tests, the company should think about whether to make
changes in the composition of the compensation committee, without regard to
whether the bill ultimately becomes law.
5. Survey Services Provided by Compensation Advisers
The proposed SEC rules would require additional disclosures, if the
compensation committee’s compensation consultants provide services to the
company in addition to the compensation-related services provided to the
committee. In addition, proposed legislation would direct the SEC to establish
independence standards for compensation consultants or other similar advisers to
Compensation committees should review with management the full range of any
services that the compensation committee’s consultants otherwise perform for the
company. Management should provide a report describing those services and the
fees for each service. The compensation committee should consider the
appropriateness of using a consultant that performs other work for the company,
and if so, what processes should be in place to approve and monitor those
services to guard against conflicts of interest.
6. Develop Compensation-Related Risk Assessment Procedures
The proposed SEC rules would broaden the proxy statement Compensation
Discussion and Analysis to require a risk management discussion, if the risks
from compensation policies and practices have a “material effect” on the
company. Compensation committees will have to undertake a review of compensation
risk to determine the scope of the company’s disclosure obligations under these
proposed rules. Compensation committees should plan now for a comprehensive risk
analysis by the end of the year.
7. Prepare for Advisory Shareholder Votes on Compensation Structure
The pending legislation would require all publicly traded companies to hold
an annual shareholders’ “say-on-pay” vote. The vote would be advisory only, and
would not be binding on the company. The subject matter of the vote would be the
compensation of the named executives as disclosed in the company’s proxy
statement. Compensation committees may want to reach out now to some of the
company’s largest shareholders to find out what their concerns are and what sort
of response the shareholders are likely to give if presented with an advisory
The company and the compensation committee should begin considering what
should be included in the proxy and how the vote proposal should be phrased for
inclusion in the proxy statement. The company should think about whether to
submit an advisory say-on-pay resolution to shareholders in 2010, without regard
to whether the bill ultimately becomes law.
8. Anticipate Other Governance-Related Shareholder Proposals
Even if the proposed SEC rules are not adopted, and the proposed federal
legislation is not passed for the 2010 proxy season, companies may receive
shareholder proposals on various aspects of corporate governance. Key corporate
governance shareholder proposals from the 2009 proxy season include advisory
vote on executive compensation, majority voting for uncontested director
elections, requiring an independent board chairman and the repeal of classified
boards. With the heightened focus of these areas, companies should think about
how they would respond if they receive one of these shareholder proposals.
9. Know Your Shareholders
Companies should identify their largest and most active shareholders, and
survey the nature of the shareholder base generally. Is it primarily
institutions? Are there numerous holders of positions exceeding 1% of the
outstanding shares? How many shares are held in individual accounts? What is the
voting history of the company’s shareholders? Companies may want to reach out
now to some of these shareholders to find out what their concerns are with
respect to governance issues, and what sort of actions shareholders are likely
to take in 2010 with respect to these issues.
Under the newly revised NYSE Rule 452, brokers no longer have the discretion
to vote on the election of directors without instructions from their clients.
Brokers still have the discretion to vote on “routine matters” such as the
ratification of auditors. However, if a routine matter is not included in the
proxy, brokers will not be considered present for quorum if they have not
received voting instructions from their clients. If a quorum were not present,
the annual meeting would have to be adjourned. Companies should survey whether
their shareholders who hold in street name generally give voting instructions to
their brokers. In addition, companies should include at least one routine matter
in the proxy so that brokers will count toward quorum.
Companies should also reevaluate whether, or to what extent to use, the
notice and access rules for proxy delivery. Would the number of shareholders who
vote decrease if hard copy proxy materials were not mailed to them other than by
special request? If decreased voting is likely to result, will it matter for
items expected to be on the meeting agenda?
10. Start Early!
Revised NYSE Rule 452 applies to shareholder meetings held on or after Jan.
1, 2010, and it is anticipated that the proposed SEC rules and federal
legislation will be in effect for the 2010 proxy season. New disclosures could
require companies to discuss the manner in which governance topics were
addressed in 2009. Such circumstances may make early action on the topics
discussed above desirable.
McGuireWoods LLP assists clients in complying with their corporate
governance and public reporting obligations, and we actively monitor
developments relating to the issues discussed above. We are ready to assist you
to comment on the proposed rules, and to assist you in preparing to respond to
any changes in the area of corporate governance.
34-60215 — SEC Order Approving Amended NYSE Rule 452.
Facilitating Shareholder Director Nominations;
33-9052 — Proxy Disclosure and Solicitation Enhancements.
Shareholder Bill of Rights Act of 2009 introduced by Senator Schumer on May
Shareholder Empowerment Act of 2009 introduced by Representative Peters on
June 12, 2009;
Corporate and Financial Institution Compensation Fairness Act of 2009
introduced by Representative Frank on July 21, 2009, passed by the U.S. House on
July 31, 2009 and sent to the Senate on August 3, 2009 for approval.