Looking Ahead at 2010 By Looking Back at 2009

Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning. – Sir Winston Spencer Churchill

Don’t look back. Something might be gaining on you. – Leroy (Satchel) Paige

As 2009 comes to a close and we prepare for the 2010 proxy season, it is time to contemplate the changes that have occurred, and what they might portend for 2010. The two quotes above seem to best encapsulate both the mood and the reality of those involved in corporate governance.

As 2009 started, advisors and observers hunkered down to weather all of the dramatic changes that appeared to be certainties: Proxy Access, ‘Say on Pay’ (SOP), and separation of the role of Chairman from that of Chief Executive would altered by legislative fiat or regulatory order. Yet despite all of the motion and noise, only one major governance change took place in 2009, that of the Securities and Exchange Commission amending the broker discretionary vote, NYSE Rule 452, relating to director elections. 2009 might have been an even more dramatic year for corporate governance had it not been for the Obama administration focus on health care. This shift in attention on the part of the White House has been cited by numerous commentators as a key reason for the decrease in momentum of financial and governance-related regulation and legislation.

Looking ahead to 2010, the table is mostly set, but surprises are still possible. The Securities and Exchange Commission surprised many observers earlier this week by reopening the comment period on the Proxy Access issue (please see our note below regarding our survey on proxy access, a follow-up to our analysis of the 500 plus comment letters to the SEC on this question) after a review of research provided by the Business Roundtable and the Council of Institutional Investors. This past Wednesday the Commission also approved additional disclosure requirements on compensation, risk, board diversity and director nominee qualifications (see stories and links under Investor Action). The action on disclosure was not unexpected and the Commission expects to have specific rules in place for the 2010 proxy season.

The Issues “Gaining” on Us

At the end of 2008, a number of commentators predicted an SEC tilted toward activists and institutional investors, with the enactment of proxy access and ‘Say on Pay’ slotted for the 2011 proxy season. However, public anger over TARP, the financial bailout, and the continuing credit crunch left the impression that investor agenda items would move to the forefront and be codified as rules for the 2010 season. Those expectations were clearly, in retrospect, overstated.

At the risk of being redundant, proxy access and ‘Say on Pay’ are likely to either become law or SEC mandates by the end of 2010. However, the future for these two investor agenda items do not look quite the way many expected at the end of 2008, or for much of 2009.

‘Say on Pay’

The House of Representatives last week passed H.R. 4173 – The Wall Street Reform and Consumer Protection Act of 2009. This bill includes a number governance-related reforms, notably provisions for ‘Say on Pay’ and legal authorization for the SEC to propose proxy access. The question now is how will the Senate view the House bill, and which of the bills (among them Senator Schumer’s Shareholder Bill of Rights), will pass the Senate and reach the conference committee reconciliation process with H.R. 4173.

Hearings on the Schumer and other Senate bills, including ‘Say on Pay’, are likely to take place sometime in the first quarter of 2010 – depending of course on the fate of health care. This means that there remain opportunities for interested parties to shape ‘Say on Pay’ from the annual vote favored by some activist institutions to a bi-annual or tri-annual referendum on executive compensation as proposed by the United Brotherhood of Carpenters (UBC). While many companies are adopting an advisory vote on pay in advance, it is not entirely clear what form ‘Say on Pay’ will take, and investor advocates remain concerned this issue may slip from their grasp.

Proxy Access Looms

The most contentious issue, Proxy Access, remains unfinished as 2009 comes to an end. For most of the year commentators from all sides believed ‘access’ was a done deal and were awaiting a 3/2 Commission vote for a race to the courthouse. That, as seen through the SEC’s reopening of the comment period on proxy access, has clearly not been the case. As of now the Commission is seeking additional information and input from all interested parties as it pertains to ‘workability issues.’

As mentioned in previous issues of our newsletter, The Altman Group published a special report detailing proposals contained in 500+ letters submitted to the SEC on “facilitating shareholder director nominations.” In the report’s conclusion, we recommended that: “Before proceeding further, the SEC might consider taking the time to do a broader survey of companies and likely users of the proposed rule – in particular with regard to eligibility and threshold criteria.”

The Role of Private Ordering

Private ordering, where boards, companies and their shareholders arrive at consensus on issues such as ‘Say on Pay’, continues to play a role in shaping corporate governance best practice. As we move into 2010, private ordering may play a larger part in helping to determine the nature of ‘Say on Pay’, and perhaps proxy access as well. Often private ordering is the direct result of activist institutions negotiating with companies over issues such as compensation. When looking at ‘Say on Pay’, private ordering can result in companies enacting similar proposals in different ways.

Different Dance Partners, Different Music, Similar But Not Identical Results

With both ‘Say on Pay’ and Proxy Access still open questions, some wonder what role, if any, private ordering will play. How would the Senate (and legislative sponsors Schumer and Dodd) react to several companies agreeing to enact SOP? What if the UBC were to convince another five or six large/mega cap firms to undertake their tri-annual approach, as Microsoft did? Does Goldman’s adoption, as the most prominent post-TARP bank, of an annual SOP vote make an annual referendum more likely to be the standard? Would that change the nature of the discussion and proposals in the Senate? The same questions occur relating to the issue of Proxy Access. Would enactment of the Delaware opt-out provision by a number of companies create a groundswell for Congressional action and a further rethinking by the SEC?

These are open questions because the individual actions of companies and investors can have an impact on the views of regulators and elected officials. What is clear is that these unsettled matters will be coming to a head in 2010 against a backdrop that includes the fallout from the amending of Rule 452 and new rules pertaining to disclosure on compensation, risk, director nominee selection and board diversity. To go out on a limb, it appears that both SOP and Proxy Access will be fully realized by the end of 2010. However, the shape and scope of these measures still remain to be seen. The only safe prediction to make is that the 2010 proxy season will set the table for 2011.

The Altman Group’s Opinion Survey Regarding “Facilitating Shareholder Director Nominations” (“Proxy Access”)

The Altman Group is conducting a survey of opinions regarding issues raised by the SEC’s latest proposing release on “Facilitating Shareholder Director Nominations” (“Proxy Access”). The SEC indicated in its release of December 14, 2009 (33-9086, File No. S7-10-09) that it is seeking more input on the potential impact of Proposed Rule 14a-11. In particular, the Commission has reopened the period for comments to obtain more input on data and conclusions found in several studies previously submitted to the SEC (and which are available in the public comment file [No. S7-10-09]). As part of a planned response by The Altman Group to the SEC’s requests for comments, we are asking that executives and directors of public companies participate in a very short survey (only 20 questions/5-10 minutes), which was designed to provide constructive insights into selected issues concerning the SEC’s proposed rule on direct proxy access. To participate, please go here.