Corporate Governance

The SEC and Corporate Governance: The Limits of Disclosure (Exchange Act Release No. 61175)(The Growing Polarization in the Corporate Governance Debate)

By J. Robert Brown

We are discussing the SEC's latest corporate governance disclosure requirements adopted in Exchange Act Release No. 61175 (Dec. 16, 2009). In a final comment, we note the increasing polarization of the corporate governance debate.

In accepting comments, the Commission heard from a wide array of constituencies.  That is not particularly surprising.  But what was noticeable was the firm divisions between constituencies, without much in the way of middle ground.  It was not unlike the democratic and republican divide on health care.

This could be seen with respect to the proposals concerning disclosure of risks associated with compensation policies for employees.  As the Commission noted:  "Individual investors, trade unions, institutional investors and pension funds supported the proposals."  And the opposition?  "Most companies, law firms and bar groups opposed the proposal."  It is not unlike access, where the same groups more or less stack up on opposite sides.  The result?  The Commission "consider[ed] the comments," promptly adopted the "disclosure requirement substantially as proposed with some modifications." 

As we have noted, there is increased polarization at the Commission, with the recent guidance on climate change passing by a 3-2 vote.  In the debate over corporate governance reform before the Securities and Exchange Commission, there likewise appears to be increased evidence of polarization.    

The approach is short sighted.  As we noted, the opposition to access ultimately succeeded in getting the Commission to ban access bylaws in December 2007.  Access bylaws required a two step process for shareholders to elect directors to the board.  First they had to prevail upon shareholders to pass the bylaw.  Then, a year later, they could nominate directors but had to again prevail upon shareholders to support them.  It was a slow cumbersome process that was likely to rarely result in the election of shareholder nominated directors.  Indeed, three companies in 2007 voted on access bylaws and in two cases they failed (passing only at the relatively small company, Cryo-Cell). These instances are discussed in The SEC, Corporate Governance, and Shareholder Access to the Board Room.

The result of polarized opposition was that the membership of the Commission changed and an access proposal was quickly issued that would, if adopted, provide shareholders with the right to insert directly their nominees into the company's proxy statement.  In other words, the two step process was eliminated for something much more blunt, and much more direct, than what has originally been proposed.  While it will probably not have a material impact on board membership, the current access proposal will have far more than the access bylaw proposal. 

Had there been a compromise on the access bylaw process, the Commission likely would not have made this current proposal.  The polarization in the end is unfortunate.  It entails a reduction in the consensus over the SEC's regulatory approach and leaves open the possibility that regulatory requirements will shift more dramatically each time regime change occurs at the Commission. 

Full post as published by The Race to the Bottom on February 25, 2010 (boomark / email).