Monday, April 19, 2010

Industry Groups Oppose Senate Reform Bill's Corporate Governance Provisions

In a letter to the US Senate, industry groups including the Chamber of Commerce and the Business Roundtable said that provisions in the Restoring American Financial Stability Act such as mandating a shareholder right to proxy access and an advisory vote on executive compensation and requiring majority voting in uncontested director elections would federalize corporate law, thereby creating a “one-size-fits all” approach to the resolution of these issues. The measure’s corporate governance provisions would also impose an unwarranted burden on mid-sized and smaller companies, marginalize the state corporate law expertise that has been developed over decades and is better suited to address these issues, and undermine ongoing reforms undertaken by the State of Delaware and the “Model Business Corporation Act,” which impacts 30 states.

Further, the industry groups maintain that the corporate governance provisions would, if enacted, unleash an onslaught of activists trying to manipulate the proxy process to force corporate decisions that adversely impact shareholders as a whole in order to further their parochial social or political agenda. The letter also said that the measures would saddle the SEC with significant additional responsibilities at a time when it is struggling to perform its existing mission critical goal of protecting investors.

The Senate legislation would gives shareholders a say on pay with the right to a non-binding vote on executive compensation. The bill also authorizes, but does not require, the SEC to grant shareholders proxy access to nominate directors. It does require directors to win by a majority vote in uncontested elections, which should help shift management’s focus from short-term profits to long-term growth and stability

Most public companies currently elect directors using the plurality standard, by which shareowners may vote for, but not against, a nominee. If shareowners oppose a particular nominee, they may only withhold their votes. As a consequence, a nominee only needs one “for” vote to be elected and unseating a director is virtually impossible. Plurality voting in uncontested situations results in "rubber stamp" elections. Majority voting ensures that shareowners’ votes count and makes directors more accountable to shareowners.