As Securities and Exchange Commission Chairman Mary Schapiro ramps up her regulatory agenda with the goal of righting some of the wrongs of the financial crisis, corporate governance processes and the role of corporate directors are clearly on the docket. In early March, rumblings on the specter of proxy access, changes to broker voting, and new disclosures on the backgrounds and qualifications of directors began reverberating in boardrooms, especially those in the financial sector.
One of the first items on Schapiro’s agenda appears to be granting greater proxy access to shareholder groups, which would make it easier and less costly for them to nominate directors and could have a destabilizing effect on director elections. So far, Schapiro appears to back proxy access, identifying one of the SEC’s goals as “giving shareholders a greater say on [both] who serves on corporate boards and how company executives are paid.” Last month, Reuters reported that Schapiro had instructed SEC staffers to begin drawing up proposals for proxy access.
“I think shareholder access to the proxy statement is one piece of regulation that was blocked by [former SEC Chairman Christopher] Cox, but one that Schapiro will bring forward very shortly, as she will be less swayed by corporate blockers,” predicts Paul Hodgson, a senior research associate at The Corporate Library, who envisions widespread proxy access by 2010. In 2007, Cox shut down a proposal that would have given proxy access to shareholders with a 5 percent stake in a given company. Now, current commissioners Elisse Walter and Luis Aguilar say that such a requirement is too high. One idea reportedly on the table is a tiered approach that would set levels of required ownership for shareholders to obtain access, based on company market capitalization.
The SEC also appears close to acting on a change to brokervoting rules. In late February, the New York Stock Exchange refiled a proposal with the SEC to eliminate brokers’ ability to vote uninstructed shares in director elections. The SEC ruled in favor of the proposal last year only to be overturned by Cox, so approval is thought to be a near certainty this time around. In fact, although the NYSE proposed a 2010 start date, some observers expect the proposal could be in effect early enough to have an impact on the current proxy season.
“Just because a company has the right procedures and policies doesn’t mean it is being run well.”
- Paul Hodgson
Another SEC priority is the introduction of new rules related to risk assessment. Though risk assessment isn’t necessarily the domain of the SEC, shareholder demands for an overhaul could lead to new policies.
“[Risk] is a subject that everyone’s thinking about,” Hodgson says. “Just because a company has the right procedures and policies doesn’t mean it is being run well. There needs to be a commitment from directors that having a risk committee in place means that they are actively assessing risk.” Part of the effort to encourage greater oversight of risk could include new disclosures about the skill level of directors. A recent story in The Washington Post, attributed to “unnamed SEC sources,” raised the possibility of new reporting requirements about director credentials and specifically about their knowledge of risk management. Just what form those requirements would take is still unclear. The Sarbanes-Oxley Act required the SEC to mandate that companies designate at least one financial expert on the board. Is a riskexpert designation next?
The report also said Schapiro plans to look into whether boards of financial-services firms conducted effective risk oversight during the time leading up to the financial crisis.