“What happens in Washington, stays in Washington.” Some corporate directors wish it were so, given the seeming flood of rules and regulations coming out of the Capital City these days. Directors can’t stop the deluge, but they can navigate it—and even help direct its course through commentary. Here’s a guide.
Among federal agencies, the two most active in governance have been the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB).
The Commission’s Agenda
SEC Chair Mary Schapiro recently announced her rulemaking agenda in testimony before the Senate Appropriations Subcommittee on Financial Services and General Government. Noting the accomplishments of her agency in 2009, including proxy-disclosure enhancements and the end of discretionary broker voting for directors, she highlighted several 2010 agenda items ,including proxy-access rules, to“facilitate the effective exercise of the rights of shareholders to nominate directors to the boards of the companies they own.” The SEC is still receiving comments on this proposed rule, Facilitating Shareholder Director Nominations, well past the January deadline. In its early comment on the rule, the NACD emphasized that any new rule should include a mechanism for nominating/governance committees of the board to comment in the proxy on any candidates proposed directly by shareholders, as well as on the committee’s own nominees.
In a related development, SEC staff members are working on a “concept release” on proxy voting, reportedly slated for July 2010. (Concept releases, which are issued only a few times a year at most, are the SEC’s way of testing the waters for a potential revised or new rule.) This concept release would be an important companion to the one on equity market structure issued in January 2010—which presciently addressed the underlying causes of the market crash five months later. Aimed at reforming flaws in proxy voting, this upcoming concept release responds to proxy plumbing concerns expressed by a variety of constituents in the corporate governance community, including chief executives, directors and investors. Problems likely to be tackled include empty voting, double voting and anonymous voting due to default applications of the “objecting beneficial owner” (OBO) category rather than non-objecting beneficial owner (NOBO).
Prioritization is the theme as the PCAOB studies comments received from the Proposed Auditing Standard on Communications with Audit Committees. Comments show that laundry lists are out, key issues are in. In the words of NACD Director Dennis Beresford, who chairs the Fannie Mae audit committee, “A significant danger is that auditors would perhaps focus too much on meeting these extensive requirements to the detriment of truly effective communications with audit committees. For example, audit committee members probably are more interested in knowing auditors’ assessment of the quality of financial management and the ‘tone at the top’ of a corporation than most of the matters covered by the required communications.”
“I do think that the PCAOB really needs to learn more about what audit committee members want to hear from auditors before finalizing a new standard.” —NACD Director Dennis Beresford
Beresford, former longtime chair of the Financial Accounting Standards Board (FASB) and now an accounting professor at the University of Georgia, commended that board for its initiative, but suggested dialogue: “I do think that the PCAOB really needs to learn more about what audit committee members want to hear from auditors before finalizing a new standard.”
Beresford is co-chairing the NACD 2010 Blue Ribbon Commission on the Audit Committee along with NACD Director Michele Hooper, another champion of focus. When the corporate community was pushing back against (now-defunct) Audit Standard 2 implementing Sarbanes-Oxley Section 404 on assessment of internal controls, Hooper gave Roundtable testimony urging the PCAOB and SEC to focus more on risk oversight and less on noncritical issues, and the dialogue succeeded, yielding a more effective and efficient Audit Standard 5. The dialogue is déjà vu all over again, as one of the Commission members is Brian Wolohan, associate director at the PCAOB’s Office of Research and Analysis.
Dodd Bill Advances
Financial stability may not return any time soon to our fair land, but S.3217, the Restoring American Financial Stability Act of 2010, is well on its way to passage. On May 5, the Senate voted 93-5 to pass an amendment from Senate Banking Chairman Christopher Dodd (DCT) Dodd and ranking member Sen. Richard Shelby (R-AL) to address concerns about the bill’s potential for more major bailouts. The new amendment includes an orderly liquidation mechanism for the Federal Deposit Insurance Corporation to unwind failing financial firms that are “systemically significant.” Shareholders and unsecured creditors will still bear losses and management will be removed. Regulators will still have the authority to break up a company if it poses a “grave threat to the financial stability of the United States.” Following the May 6 glitch-driven crash in markets (the day after passage of the amendment!), Dodd told the host of Face the Nation that his financial reform legislation could have helped protect U.S. markets.
The governance provisions in the Dodd financial bill, outlined in the April/May “Washington Update” remain untouched. Starting at Sec. 951, these include new rules on say-on-pay, compensation committee independence, executive compensation disclosures, clawbacks, prohibitions on employee and director hedging, as well as voting by brokers (now moot due to the SEC’s 2009 broker voting rule). Moving on to Sec.971, the governance provisions in the bill cover majority voting, SEC authority to issue rules on proxy access, and disclosure regarding chair and CEO separation (moot due to the SEC’s 2010 proxy rule mandating such disclosure “enhancements” among others).
To cope with these new requirements, likely to be signed into law soon, boards should adopt NACD’s Key Agreed Principles as a minimum standard for governance. Directors then need to work closely with internal and external counsel on complying with the new requirements, which mostly involve issues of communications and disclosure rather than policy.
Will this bring a flood of new lawsuits? Is this a case of “après moi le déluge” (to quote the weather predictions of King Louis XV of France). It’s just one more reason to engage proactive legal counsel to keep the waters at bay.