SEC Chair Outlines Efforts Promoting Sound Corporate Governance in Line with Global Principles

Noting that poor corporate governance contributed to the current financial crisis, SEC Chair Mary Schapiro detailed steps the Commission is taking to enhance transparency and accountability in the governance of public companies. In her keynote address at the Transatlantic Corporate Governance conference, the SEC official said that the Commission is working to improve the accountability of corporate managers to the owners of the company. She emphasized that the SEC is operating with an invigorating sense of urgency.

The financial crisis cast into stark relief the problems associated with corporate governance. In particular, boards of directors did not thoroughly question the decisions of senior management to take on risks. Of equal concern, boards often appeared to misunderstand the gravity of risks taken. Senior management took higher returns at face value, noted Ms. Schapiro, without questioning why such higher returns were possible for supposedly safe investments and strategies. In addition, too many boards failed in their primary function of diligently overseeing management. As a result, too many managers took on too much risk and made decisions that were too focused on the short-term.

The SEC Chair set forth a good workable definition of corporate governance as being about maintaining an appropriate balance of accountability between three key players: the corporation's owners, the directors whom the owners elect, and the managers whom the directors select. Accountability requires not only good transparency, she averred, but also an effective means to take action for poor performance or bad decisions.

This definition leads into a discussion of the efficacy of the SEC’s shareholder access proposal which, in this context, is part of good corporate governance. The SEC Chair believes that the most effective means of ensuring that corporations are accountable is to ensure that the shareholders' vote is both meaningful and freely exercised, which is why the SEC proposed rules removing obstacles to shareholders' ability to nominate candidates for the boards of directors of their companies.

Under the proposal, shareholders who otherwise are provided the opportunity to nominate directors at a shareholder meeting would, subject to certain eligibility and procedural requirements, be able to have their nominees included in the company proxy that is sent to all voters. Shareholders would also have the ability to use the shareholder proposal process to modify the company's nomination procedures or disclosure about elections, so long as those proposals do not conflict with state law or SEC rules. The SEC has received over 500 comment letters on the shareholder access proposal, she noted, and is currently reviewing them.

The Commission has also proposed a series of additional measures seeking to improve proxy disclosure and the process by which shareholders exercise their vote. These new disclosures would include expanded information about the relationship between a company's overall compensation policies and the company's risk profile; the qualifications of directors, executive officers and nominees; the board's leadership structure; and potential conflicts of interests of compensation consultants.

The SEC’s proposals are in keeping with high level principles on the effective governance of compensation, emphasized the official, which is a key component of sound corporate governance. The Commission endorses the Financial Stability Board report calling for the effective alignment of compensation with prudent risk taking and the effective supervisory oversight and engagement by stakeholders. In turn, the Financial Stability Board’s principles have been endorsed by the G-20 Finance Ministers, who recently issued a communiqué calling for a framework on corporate governance and executive compensation practices designed to prevent short-term risk taking and mitigate systemic risk. The new executive compensation regime should be globally consistent and build on and strengthen the application of the Financial Stability Board principles.

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