There is an old saying in Chicago that if you don’t like the weather just wait a few minutes as it is sure to change. Lately it feels like a similar sentiment can be applied to the SEC, if you don’t like the regulations being passed just wait as they are likely to be amended or put on hold. As the one-year anniversary of passage of the Dodd-Frank approached, we continued to hear rumblings that change was on the horizon. With the added issue of financial shortcomings in Washington, it should come as no surprise to anyone that many deadlines have been pushed back. While there will undoubtedly be more change ahead, let’s consider what we do know at this point and how it is likely to impact executives and boards of directors.
Ted Dysart
There are numerous issues that have come to light over the last couple of years (and some which have been raised for decades) with regard to Corporate Governance and an overall feeling of hurry up and wait. Proxy access seems to be on the minds of many especially with the court ruling against the SEC, and the SEC deciding not to appeal. But this is not the end of the road for proxy access debate; in fact, the debate is on-going. SEC Chairman Mary Schapiro has made it clear that her intent is to find a way for shareholders to have an equal say in director nominations and will not be backing away from the issue. The arguments are passionate on both sides and there doesn’t seem to be an easy resolution. Regardless of the official regulations, companies need to take a look at their own practices and make sure they are working toward an amicable balance between what is right for the company and what the shareholders are demanding. We are seeing many companies enacting their own best in practice regulations with regard to this issue which clearly lay out who can have access, what the protocol is for submitting material to be included in the proxy and what type of communication shareholders can expect with regard to submissions. The reality of today is this: Shareholders want to be heard and boards had better (at the very least) listen.
Another topic that gets a lot of press is say on pay, which remains a divisive topic. It seems to be a subject that is always put in the spotlight when the economy is not as strong as investors and the public at large would like it to be. It is also a favorite topic in the media, especially when there is a shakeup at a company. Investors always want their money to be used wisely, and having a say on pay is part of that equation. Should top executives get flat rate pay with a predictable bonus structure based on performance, or is there room to reward and penalize based on performance and health of a company? And what about change-in-control compensation? More importantly who decides? Do you trust your board to make the right decision for the company and put personal feelings aside when it comes to appropriate pay decisions? And how often should votes take place for both say-on pay itself and the frequency of those votes which the SEC says should be revisited every six years. Will we lose great leaders to companies overseas that can and will pay more without the intrusion of the government and shareholders?
It is important to note that Dodd-Frank was almost 850 pages and requires more than 240 rule makings and nearly 70 studies. By comparison, Sarbanes-Oxley was 66 pages long and mandated 16 rule makings and just 6 studies. It should go without saying that there is still a lot of legal red tape and issues to be sorted out which will take years and billions of dollars. While the major impact of Dodd-Frank has yet to be felt we can look and wonder about those issues that have surfaced. Will the whistleblower protection remain unchanged? Will there be more reform with regard to background disclosures for board nominations? Whatever side you find yourself supporting on the various legislative issues, it is clear that companies need to keep a close eye on the issues and continue to organize their board to fit the needs of all interested parties— government, shareholders, executives and employees.
Theodore L. Dysart is a vice chairman with Heidrick & Struggles where he is a leader in the global Board of Directors Practice.