Corporate Governance

Corporate Governance and the SEC: The Remaining Problems

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 proposals leave two critical issues unaddressed.  The first concerns blank voting.   We have mentioned the problem on this Blog of blank votes.  When a shareholder executes a proxy but leaves an item blank, Broadridge apparently fills in the item.  Moreover, the software performing the function apparently votes  in favor of management.  According to a petitioned filed with the Commission by James McRitchie and a group of co-filers: "When a retail shareowner using Broadridge's proxyvote.com platform votes for or against at least one item on a proxy but fails to vote on other items, each item they fail to vote is cast in favor of the company's recommended position."  Thus, an unvoted item is really a vote for management.

The Commission should simply amend Rule 14a-4 and prohibit this practice.  There is no particular reason to believe that a shareholder leaving a matter blank is intending to transfer discretion to management.  Allowing companies to vote the shares is much like allowing brokers to vote uninstructed shares, something that was recently limited when the Commission amended NYSE Rule 452.  Moreover, at least Rule 452 limits voting to routine matters.  The blank voting problem allows shares to be voted on substantive matters where they can, in close cases, affect the ultimate outcome.

The other matter that requires consideration by the Commission is an added item to the current report on Form 8-K that would require companies to disclose decisions by boards not to accept a letter of resignation when a director does not receive a majority of the votes cast as required by an applicable bylaws, charter provision or guideline.  Moreover, the company should be required to set out the reasons for the refusal and the form should be signed by the directors who participated in the decision making process.

Some majority vote provisions set out that they will file a current report, but some do not.  Moreover, as the litigation in City of Westland v. Axcelis Technologies illustrates, there is no real guarantee that the same information can be obtained under state law inspection rights.  Rather than leaving matters to the pro-management courts in Delaware, it would be better to federalize the area and require affirmative disclosure that then becomes subject to the rigors of the antifraud provisions.

Full post as published by The Race to the Bottom on August 04, 2009 (boomark / email).