Archive for August, 2010

Proxy Plumbing Fixes are Desperately Needed

by David A. Katz for The Harvard Law School Forum, August 31st, 2010.

The U.S. proxy system is set to undergo a comprehensive review for the first time in nearly 30 years. The Securities and Exchange Commission (SEC) recently voted unanimously to issue a concept release “seeking public comment on the U.S. proxy system and asking whether rule revisions should be considered to promote greater efficiency and transparency.” [1] This so-called “proxy plumbing” concept release marks the beginning of what will certainly be a years-long process with an emphasis on fact-finding to examine the effects of shifts in “shareholder demographics, the structure of share holdings, technology, and the potential economic significance of each proxy vote.” [2]

Major reform of the voting infrastructure is long overdue. Significant structural and procedural changes in shareholding and proxy voting over the last 30 years have fundamentally altered and expanded the proxy landscape. [3] The SEC estimates that more than 600 billion shares are voted every year at more than 13,000 shareholder meetings. [4] The concept release, which is necessarily wide-ranging, welcomes comments on all aspects of the proxy process and solicits comments on specific issues in three general areas: (1) the accuracy, transparency and efficiency of the voting process; (2) shareholder communications and shareholder participation in the proxy process; and (3) the alignment of voting power and economic interest. (continue reading… )

Compliance vs. Security: Which Should Lead Corporate Governance?

by Mark McClain for E-Commerce Times, August 31st, 2010.

Too often companies are so focused on following the letter of the law to pass the internal and external audits mandated by federal regulations that they lose sight of the original intents of the mandates themselves. Identity governance is an emerging category within identity management that addresses the business and IT dimensions of risk management by taking a governance-based approach to identity management.

As companies battered by the recession have begun emerging from their cautionary stances, many are re-evaluating their IT security budgets and looking to solve the age-old question: “What should drive our strategy, security or compliance?” Now is the perfect time for companies to consider the right approach to an important component of their IT security strategy — identity management — with the goal of meeting both security and compliance objectives, while streamlining and automating processes to save time, money and resources.

Across industries worldwide, government regulations have evolved rapidly to address transparency, privacy and consumer data protection. Based on this expanding level of oversight, it is apparent that most regulatory bodies believe the typical large enterprise, left to its own devices, will not invest adequately to protect privacy, prevent fraud or effectively manage risk. This was certainly the case with many well-known regulatory efforts, including Sarbanes-Oxley, HIPAA, PCI, NERC CIP and Basel II. The foundational belief was that government, or in some cases industry, must mandate action in order to motivate the right behavior from companies. (continue reading… )

Finally, Governance Becomes Possible

by Ira Millstein and Stephen Davis for Millstein Center at YALE School of Management,  August 30, 2010.

Thirty years late, the new Dodd-Frank Act hands shareholders power to influence the composition of boards and shape CEO pay. But will these institutional investors, on whom Americans depend for their financial security, use their authority responsibly? Will corporate boards welcome and accept good faith dialogue with their shareholders? Will both sides forego short term financial engineering and align for the long term performance the country badly needs?

For decades, investors, anxious about a company gone awry, have had little choice but to complain from the sidelines, petitioning finger-wagging resolutions directors could easily ignore. Shareholders tried that to no avail at AIG before its epic collapse. Defenses fortified under-performing boards from pressure they should have faced to better control risks and tie CEO pay to measurable actual performance over time. But resolutions and defenses did not stop short-term funds that piled disabling debt on companies. Aggressive investors could cherry-pick firms for proxy fights or use stock techniques to harass. Long term institutional investors were shackled; the short term prevailed. One result: Too many boards tolerated management excesses and failures that ushered in the financial crisis.

Now comes Dodd-Frank. The hardest-fought governance provision in the Act is one that affirms the US Securities and Exchange Commission’s authority to make it easier for investors to nominate candidates to corporate boards. Code named “access,” such rules promise to put pressure on troubled companies to give investors reasons to stay loyal-or risk rebellion. The market won’t collapse once access is part of the governance furniture. Similar rules exist around the world without causing anarchy. Under new SEC rules, challengers holding stock for at least three years would have to meet a 3% ownership threshold to petition a candidate – and then muster a majority vote to get him or her elected. That’s tough unless a company is floundering or a board deeply out of touch. Still, just the existence of access is a powerful signal that alters the balance of power. (continue reading… )

Christopher R. Conte, Associate Director of Enforcement, to Leave After Nearly 18 Years at SEC

by The U.S. Securities and Exchange Comission, August 30th, 2010.

The Securities and Exchange Commission today announced that Christopher R. Conte, an Associate Director in the Division of Enforcement, will leave the SEC next month after nearly 18 years of public service at the agency.

Mr. Conte has overseen many significant enforcement cases ranging from accounting fraud and disclosure violations to unlawful market timing. For example, Mr. Conte played a lead role in the SEC’s enforcement actions against Dell Inc. and its senior officers and against former executives at Comverse Technology. He also helped guide the SEC’s cases against Morgan Stanley, J.P. Morgan, and Robertson Stephens, Inc involving unlawful IPO allocation practices.

“Chris’s extensive experience and deep commitment to investor protection made him a strong force in the effort to hold accountable those who violate the securities laws,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “After a long and fruitful career at the SEC we wish Chris the very best.” (continue reading… )

Proxy Access and Director Qualification Requirements

by Keith Bishop for California Corporate & Securities Law , August 30th, 2010.

Last week, the Securities and Exchange Commission adopted its final changes to the federal proxy rules.  These new rules will require public companies, under specified circumstances, to include in their proxy materials information about, and the ability to vote for, a shareholder’s (or shareholder group’s) nominee(s) for director.  In adopting these rule changes, the SEC expressly declined to allow for the exclusion of shareholder nominees who do not meet a corporation’s director qualification requirements.

The California General Corporation Law does not specify any qualifications for election and service as a director.However, Corporations Code Section 212(b)(4) does authorize a corporation to include in its bylaws a provision (to the extent not in conflict with law or the articles) specifying the qualifications of directors.  For example, a bylaw could require that a director be a shareholder.  There may also be regulatory or other reasons for imposing particular qualifications.

What happens when a shareholder nominates someone who doesn’t meet the qualification requirements of the bylaws?  The SEC’s rule changes will require that the nominee be included in the corporation’s proxy materials and in its proxy card.  Thus, proxy holders will be obligated to vote in accordance with those instructions.  However, a proxy card is not a vote and voting occurs at the meeting itself.  The SEC seems to have recognized this principle in the adopting release (“We note that state law will control what happens if a candidate is not nominated at the meeting because the person supporting the candidate does not attend the meeting or make other arrangements.”  The SEC’s adopting release also encourages disclosure in the proxy statement if a corporation’s charter documents would preclude the corporation from seating a director who fails to meet specified qualifications. (continue reading… )

Proxy Access Rule Will Lead to Greater Controversy

by Kathleen L. Casey for The Harvard Law School Forum, August 27th, 2010.

Let me start with an observation and a prediction. The observation is that it appears that a primary, if unstated, objective of this rule is to put the issue of proxy access behind the Commission once and for all. My prediction is that, paradoxically, the rule that the Commission adopts today virtually guarantees that the Commission will be forced to deal with this issue for years to come. I say this for two reasons. First, I believe that the rule is so fundamentally and fatally flawed that it will have great difficulty surviving judicial scrutiny. Second, an inevitable consequence of this rule, if it survives, is that the staff will be tasked with the unenviable responsibility of brokering disputes and addressing a broad array of issues arising from the operation of this new federal right every proxy season.

This result is unfortunate, because it was so clearly avoidable — it was not a necessary consequence of adopting a rule that would truly facilitate shareholders’ state law rights to nominate directors.

Unfortunately, the adopting release goes through a jiu-jitsu exercise of purporting to give deference to state law and to increase shareholder choices under state law, when in fact the rules do exactly the opposite. As a result, the logic does violence to our historical understanding of the roles of federal securities law, state law, shareholder suffrage and private ordering, with potentially far-reaching implications. The consequences of this exercise include a series of arbitrary choices that are not tethered to empirical data and a number of internal inconsistencies that make the rules difficult to defend. Furthermore, the rules continue a disturbing trend of empowering institutional shareholders to the detriment of individual shareholders. Finally, the policy objectives underlying the rule are unsupported by serious analytical rigor, and the release fails to fairly and adequately consider the costs and impact of these rules. In this regard, I believe these rules are likely to result in significant harm to our economy and capital markets. (continue reading… )

Speech by SEC Chairman Mary Schapiro:Opening Statement at the SEC Open Meeting

by Chairman Mary L. Schapiro.

U.S. Securities and Exchange Commission

Washington, D.C.
August 25, 2010

Good Morning. This is an open meeting of the U.S. Securities and Exchange Commission on August 25, 2010.

Today, we consider adopting rules that would allow shareholders access to a company’s proxy materials to include their nominees to the corporate board of directors.

As we discussed when the Commission proposed these rules last year, the concept that shareholders can directly participate in the director nomination process — without having to mount a proxy contest — has been debated for over 30 years. In fact, this is the fourth time in recent memory that the Commission has considered the question of amending our proxy rules to address so-called “proxy access.”

Some of the debate during the past has concerned whether the Commission has the authority to adopt these rules. That question was resolved last month, when Congress adopted and the President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act. That law confirms the Commission’s authority to act in this regard. Now it is time to resolve the issue of under what circumstances the Commission should adopt proxy access. (continue reading… )

Watch the video here.


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(in Portuguese) A weekly chronicle about shareholders' rights & duties, activism and capital markets regulation, by Renato Chaves.
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