The Securities and Exchange Commission has approved new rules to significantly enhance the level of information companies are required to provide shareholders in proxy statements, but many leaders worry that these changes will do little more than add to the expenses that shareholders pay.
The Commission has been struggling with the complicated issue of proxy access for most of the past decade and had held numerous roundtables and rule proposals that went nowhere, before finally seizing the opportunity of the recent financial crisis to push through several big changes just before the end of the year.
The new proxy disclosure requirements address compensation policies and practices as they relate to risk management; stock and options awards to executives and directors; the board's role in risk oversight; the background and qualifications of board directors and nominees; the consideration of diversity in selecting board members; the posting of 10 years of history of legal actions involving executives, directors and nominees; and any potential conflicts of interest among compensation consultants.
"Accountability is impossible without transparency," said SEC Chairman Mary Schapiro during a meeting on Dec. 16. "Good corporate governance is a system in which those who manage a company- that is, officers and directors-are effectively held accountable for their decisions and performance."
The new rules, which take effect Feb. 28, also require companies to disclose the results of shareholder votes within four business days, amending Form 8-K and replacing Forms 10-K and 10-Q.
The increased disclosure is intended to help investors determine whether a company encourages excessive or inappropriate risk-taking by its employees through its compensation methods, as well as shed a little more light on the process for selecting new directors.
"Shareholders are the owners of our publicly traded companies," Schapiro said. "Owners cannot responsibly exercise their oversight without good information about the issues that drive voting decisions."
Boards of directors are given so much power and responsibility that it can be difficult for shareholders to hold directors accountable for their actions. It can be done, but the coordination and communication required can be very expensive.
The recent economic crisis highlighted many concerns over the high levels of executive compensation, risk management and board accountability to shareholder interests. The new rules do not specifically address these issues, but set the stage for future proxy battles by providing shareholders with more disclosure information.
Most investors choose to have their broker, bank or other financial institution act as their proxy and vote on their behalf. By the time the shareholder meeting is held, most shareholders will have already made their decision well in advance and signed their proxy cards, making it difficult for any changes to happen during shareholder meetings. New developments in proxy relations could change all this.
"I expect that in the upcoming proxy season, shareholder information needs will be heightened due to the elimination of broker voting in uncontested director elections as a result of the amendments to NYSE Rule 452," said Commissioner Elisse Walter. "Ballots cast by retail shareholders will finally reflect their own decisions, not the decisions of their brokers, and I believe the amendments before us today go a long way toward helping shareholders get the information they need to make more informed voting decisions."
It can be very difficult to make a change that goes against the board's wishes, such as including socially responsible investments or limiting executive compensation.
Voting by proxy gets even more complicated for mutual fund shareholders. Most mutual fund investors are buy-and-hold investors and tend to support management.
Depending on their size, individual mutual fund investors have very little say, but as a group, they can be quite influential. While mutual fund investors can benefit by grouping together, it is much more difficult for everyone else unless they are very rich or institutional investors.
Republican commissioners say the changes are unnecessarily burdensome, encroach on internal corporate affairs and might step into the domain of state corporate laws.
"When we consider adopting rules requiring disclosure of information that is not truly decision-useful, it is critical to bear in mind that the costs and burdens imposed by these rules are ultimately borne by 100% of a company's stockholders," said Commissioner Kathleen Casey, who voted against the disclosure changes.
According to the SEC, smaller reporting companies will not be required to provide the new disclosures.
Casey is also "concerned that these enhancements are likely to result in more boilerplate language."
The SEC staff said the intent of the revisions is to provide information that is most relevant to investors, focusing on compensation policies that could create financial risks.
"Our goal at this stage is to adopt discrete amendments to improve compensation disclosure in proxy statements," according to the SEC's rule on proxy enhancements. "Therefore, we are not adopting any other changes to executive compensation disclosure at this time. However, we will consider the comments received in connection with future rulemaking initiatives on compensation disclosure."
With such a wide-ranging scope of disclosure information now required and the relatively short effective date to implement the changes, companies and their boards will be burdened by the new disclosure rules, according a report by the international law firm Gibson, Dunn & Crutcher. The changes will not be terribly expensive, but will take time for corporate lawyers to review and implement.
'More Not Always Better'
The big question is whether more information will benefit shareholders, or whether most will continue to ignore proxy statements. Too much disclosure can be overwhelming, and too much focus on risk management can cause a backlash of conservatism.
"More information is not always better than less," said Commissioner Troy Paredes. "While lawmakers should acknowledge the prospect of excessive risk taking, we also must recognize that companies can take too few risks. Undue emphasis on reducing the likelihood of bad outcomes can be costly if it leads to excessive conservatism."
The SEC has reopened the comment period for its proposal to increase proxy access and is expected to address this issue more specifically in early 2010.
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