CORPORATE GOVERNANCE MAY SOON GO UNDER THE MICROSCOPE

The latest in a wave of SEC proposals aimed at helping protect investors from more financial turmoil focuses on company disclosures during the proxy process. Under the SEC's newest consideration, corporate officers and directors would no longer be able to govern blindly at the risk of their shareholders. Instead, these governing bodies would be forced to disclose more detailed information in a more timely fashion to ensure that shareholders had the information necessary to make informed decisions during the proxy process.

The SEC's goal is not to provide additional disclosures, but rather to compel better disclosure in three specific proxy-related disclosure areas:

(a) Executive compensation—seeking better disclosure regarding the relationship between executive compensation policies and company risk;

(b) Director and nominee qualifications—seeking better disclosure regarding individuals' qualifications for board membership; and

(c) Board governance—seeking better disclosure as to a board's leadership structure and risk management role.

The SEC also wants to improve proxy voting disclosure by requiring more timely disclosure of annual meeting voting results. These considerations would inevitably increase transactions costs and thereby cost companies more money. However, the SEC feels that shareholders, as owners of these companies, have a right to proper disclosure by companies who are charged with managing their investments.

In addition, on July 1, 2009, the SEC issued a proposal to amend the proxy rules under the Securities and Exchange Act of 1934 to implement specific requirements for companies subject to Section 111(e) of the Emergency Economic Stabilization Act of 2008. Specifically, the proposed amendments would require that any companies receiving monetary relief under the Troubled Asset Relief Program (“TARP”) must permit a shareholder vote to approve executive compensation during the time period in which the company's TARP obligations remain outstanding. The SEC's proposal explains that “the proposed amendments are intended to provide useful, comparable and consistent information to assist an informed voting decision when registrants that are TARP recipients present to investors the advisory vote on executive compensation required pursuant to Section 111(e)(1) of the EESA.”

To read the proposed rule in its entirety, click here.