US SEC moves to shake up corporate governance

July 2, 2009

   By Rachelle Younglai
   WASHINGTON, July 1 (Reuters) – U.S. securities regulators moved to change how companies elect board members and govern themselves, tilting the corporate playing field toward investors who have complained of weak boards and lavish pay for top executives.
   The Securities and Exchange Commission on Wednesday proposed requiring companies to tell shareholders more about pay policies, board members’ qualifications and why they chose a certain leadership structure.
   The SEC also voted, 3-2, to adopt a long-standing proposal that would bar broker-dealers from voting for corporate directors on behalf of their clients unless told to do so.
    “The most fundamental way in which shareholders can ensure that directors remain accountable to them is through the director election process,” said SEC Chairman Mary Schapiro.
   The action drew immediate praise from the Council of Institutional Investors and the country’s largest labor federation, the AFL-CIO.
   Investor activists have long complained that brokers who hold the voting rights of their clients’ shares typically vote in accordance with management’s wishes, tipping the scales in contested director elections.
   “Counting uninstructed broker votes is akin to stuffing the ballot box for management as broker votes almost always are cast in favor of management’s candidates for board seats,” said Ann Yerger, executive director of the institutional investor group, whose members hold more than $3 trillion in assets.
   The new SEC rule, which goes into effect in 2010, may give activists the edge they need to oust board members.
   Both Republican commissioners on the SEC opposed the change. One of them, Kathleen Casey, said she was concerned that retail investors would be disenfranchised in favor of institutional investors.
   The biggest U.S. business lobby, the U.S. Chamber of Commerce, agreed and said this new rule dramatically shifted additional voting power from individual shareholders to activist investors. “The SEC missed an opportunity to improve proxy voting participation and allowed certain investors to jump to the head of the line,” the chamber said.
   As mandated by Congress, the SEC also voted to give shareholders an advisory vote on executive pay at more than 500 companies that received taxpayer funds under the government’s Troubled Asset Relief Program.
   The SEC separately proposed a package of measures requiring companies to tell shareholders more about pay policies and board members’ qualifications, responding to concerns that lax corporate oversight has let top executives take excessive risks to reap compensation rewards.
   Under the proposal, companies must discuss and analyze pay policies for all employees, not just top executives, if risks from compensation policies could have a material effect on the company.
   A company would also be required to detail a director nominee’s experience and skills, and the board’s role in risk management. Also, a company would have to explain why it chose to separate or combine its chairman and chief executive jobs.
   Another measure would require companies to disclose fees paid to compensation consultants when they help determine how much an executive or director should be paid. However, the disclosure would be required only if the same consulting firm provided other human resources services for the company.
   The SEC proposed requiring companies to include the estimated value for stock options granted during the year in the “summary compensation table” for top executives published annually by companies. The table now includes the value of option grants that became vested, or eligible to be exercised, during the year.
   “The SEC is missing an opportunity to change the disclosures on the summary compensation table to clarify for shareholders what executives actually make,” said Tim Bartl vice president with the Center on Executive Compensation, which represents the human resources executives of the largest U.S. corporations.
   The proposals are subject to a 60-day public comment period. It was unclear how soon the SEC may act to modify or finalize them.

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