Corporate Governance

Corporate Governance Reform and the SEC: Imposing Qualifications on the Board

By J. Robert Brown

We are discussing Exchange Act Release No. 60280 (July 10, 2009), the SEC's recent set of rule proposals designed to improve disclosure in connection with the corporate governance process.

The Commission has proposed significant increases in the amount of disclosure that must be provided for directors and nominees to the board.  The provisions will effectively require companies to increase the qualifications and expertise on the board of directors. 

The requirements address the qualifications of specific directors.  The SEC has proposed that companies disclose "the particular experience, qualifications, attributes or skills that qualify that person to serve as a director of the company . . . in light of the company's business and structure."   Rather than assess the skills of individuals, however, the disclosure is designed to enable shareholders to assess the skill level of the entire board.  As the release noted:  "These revisions are aimed at helping investors determine whether a particular director and the entire board composition is an appropriate choice for a given company as of the time that a filing containing this disclosure is made with the Commission." 

Specifically, this means that shareholders will know whether the board has anyone with expertise in assessing risk.  While the proposal spoke in general terms, the release made the focus on risk assessment clear.  As the release noted: 

• "The types of information that may be disclosed include, for example, information about a director's or nominee's risk assessment skills and any specific past experience that would be useful to the company, as well as information about a director's or nominee's particular area of expertise and why the director's or nominee's service as a director would benefit the company at the time at which the relevant filing with the Commission is made."

In effect, therefore, the disclosure requirement is largely an attempt to get risk assessment skills on the board.  SOX largely did the same thing with respect to financial expertise.  The Act stopped short of requiring directors with financial expertise but required companies to explain the absence.  This proposal will highlight boards that lack sufficient risk assessment skills, something that will likely encourage challenges under majority vote provisions or even contest when shareholders obtain access to management's proxy statement.

Full post as published by The Race to the Bottom on July 30, 2009 (boomark / email).