In recent weeks, regulators and lawmakers have proposed a dizzying array of reforms that, if implemented, would exacerbate short-termism, undercut directorial discretion, further empower shareholder activists, and impose unnecessary and potentially costly burdens on public companies. Few of the proposed reforms are truly new and nearly all are ill-conceived. They appear to proceed in part from a misguided impulse on the part of regulators and lawmakers to be seen as “doing something” about the current recession—though hardly any of the proposed reforms have even a remote connection to the origins of the credit crisis that precipitated the economic downturn—and in part from an opportunistic desire to use the financial crisis as an excuse to enact an activist “wish list” of reforms.

Overview

Members of Congress, the Department of the Treasury and the Securities and Exchange Commission (SEC) are all currently engaged in putting forth corporate governance initiatives. The proposed reforms include shareholder proxy access rules, corporate governance proxy disclosure requirements, executive compensation proxy disclosure requirements, requirements as to the structure, composition and election of the board of directors, executive compensation clawbacks, say-on-pay and independence requirements for compensation committees and their outside consultants, and mandatory majority voting. Pending federal legislation includes the Shareholder Bill of Rights Act of 2009 (Bill of Rights Act), sponsored by Senators Charles Schumer and Maria Cantwell, the Shareholder Empowerment Act of 2009 (Empowerment Act), sponsored by a group of Representatives, the Excessive Pay Shareholder Approval Act (Excessive Pay Approval Act), sponsored by Senator Richard Durbin, and the Treasury’s Investor Protection Act of 2009 (Investor Protection Act).

Amidst this veritable avalanche of reform, the SEC has already approved the New York Stock Exchange’s (NYSE) proposal to eliminate broker discretionary voting in uncontested elections beginning next year. The key features of the proposed initiatives are discussed below.

Shareholder Proxy Access

The latest chapter in the continuing saga of proxy access began in June 2009 as the SEC released proposed proxy access rules for the third time this decade. The first proposal, in 2003, was the subject of fierce debate—the SEC received a record number of comment letters on the proposal—and was shelved in 2004. The prevailing sentiment at that time was that the issue of proxy access was highly complex and carried many hidden consequences. For a time, it appeared that the issue had been largely superseded by the widespread adoption of a majority voting standard for the election of directors. In 2007, in response to a court ruling that unsettled the SEC’s long-held position that shareholder proposals on proxy access could be excluded from the proxy statement, the SEC took the unusual step of issuing two conflicting alternative proposals on shareholder access, each approved by votes of 3-2 among the SEC Commissioners. Later that year, the SEC voted to continue its policy of permitting companies to exclude shareholder proposals relating to board nominations or director elections from the company proxy statement. Now comes the latest installment, and, under the new leadership of SEC Chair Mary Schapiro, the SEC seems poised to take definitive action. The SEC comment period ends August 17, 2009, and the SEC has announced its intention to adopt final rules by November 2009 so that they will be in place for the 2010 proxy season. As part of its proposal, the SEC raised more than 500 questions that it asked be addressed in the comment process.

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