The power of conversation

Proxy system in need of serious overhaul
Tinkering with the system may make things worse
Easier identification of shareholders tops companies’ wish list
Bank of America case changing management liability
Aggressive litigants and prosecutors attack D&O policies

A group of corporate secretaries and other governance professionals, many of them in New York for the second annual Corporate Secretary Magazine Awards, gathered at Bowne’s lower Manhattan headquarters for the second Corporate Secretary East Coast Think Tank of 2009.

The group came together to address serious issues facing public companies and to attempt to garner some potential solutions. First up for discussion was fixing the proxy plumbing – ‘not necessarily sexy,’ as one panelist commented.

On the other hand, ‘people tend to become interested in plumbing when it stops working,’ joked Brendan Sheehan, Corporate Secretary’s executive editor, who moderated the event. And from the tone of the conversation there is little doubt most people think the proxy plumbing is definitely not working.

Panelists for this session – which was sponsored by Computershare – were Stephen Brown, director of corporate governance at activist institutional investor TIAA-CREF; Patrick Daugherty, partner at Foley & Lardner; Niels Holch, executive director at the Shareholder Communications Coalition (SCC); and Charles Rossi, executive vice president of Computershare. The four men certainly had their work cut out addressing a topic as broad as proxy reform, but a handful of points rapidly emerged that clearly resonated with the attendees.

Shareholder identification, the elimination of discretionary broker voting for director elections, reimbursement of proxy costs and the impact of proxy access were the most hotly contested issues. Participants discussed the SCC’s proposals, including eliminating the distinction between non-objecting beneficial owners (NOBOs) and objecting beneficial owners (OBOs), techniques for tackling the dual problems of over-voting and empty voting, and regulating the role of proxy advisory firms. The SCC laid out its suggested reforms to the proxy system in a letter to the SEC dated August 4.

A dangerous path?

‘The SEC has set off down the road of revising the rules,’ commented Holch. One of his fellow panelists warned that the idea of eliminating the NOBO/OBO distinction and increasing the ability of firms to identify holders of shares was bound to meet with resistance from hedge funds and other institutional investors.

‘Proxy access and say on pay are all just a dream until the folks in Washington push the buttons,’ said another expert panelist. ‘Then we’ll have the foundation and be ready to fix the plumbing.’ This was another way of saying that it is really impossible to make incremental changes to the system.

One of the participants commented: ‘At the moment, they just seem to be tweaking around the edges and no one is addressing the real, structural problems that exist. The way the system stands, it is damaging to both shareholders and issuers.’ The SCC wants to see some structure and a unified approach brought to the range of proposals being put forth regarding proxy reform.

Timing is always an issue with regulatory change, and while the SEC made a lot of noise about getting proxy reform in place for the 2010 season, most attendees agreed this is unlikely to happen.

With proxy season not too far away, reimbursement of proxy campaign expenses took up its share of the conversation. The issue has been on the cards for some time, and the recent changes to the Delaware General Corporation Law specifically allowing bylaw amendments to accommodate expenses incurred by dissidents during a successful director election fight make the situation more pressing.

Discussions were even more animated due to the fact that, only a week or two prior to the think tank, HealthSouth became the first large US company to formally implement reimbursement. HealthSouth will reimburse the expenses incurred by shareholders who nominate candidates for election to the board in cases where those candidates gain a majority of the votes. The company will also cover partial costs for candidates who gain 40 percent to 50 percent of the vote.

An informal poll of think tank participants revealed that no other company was currently considering implementing formal reimbursement, and one audience member cautioned: ‘It will juice the power of activist hedge funds – which doesn’t need to be juiced.’ The same holds true for proxy access, although, as Brown pointed out, most of the hedge funds we are used to seeing in activist campaigns are not overly concerned with reimbursement or access.

‘They don’t need it,’ he said. ‘Hedge funds have their own money and can run their own campaigns. These changes will be of little consequence to many of them.’

One new addition to the think tank format was the inclusion of instant voting
technology from IML, which allowed panelists to poll participants on a range of topics. At the beginning of the proxy reform panel participants were asked about their level of knowledge of the SCC, and fewer than 40 percent were aware of the group or its actions.

After an hour and a half of conversation, almost all think tank participants were interested in what the group is trying to achieve. The full results of the interactive voting will be available in a future issue of Corporate Secretary.

Bonus day

The second session of the day, sponsored by Foley & Lardner, looked at the Bank of America and the SEC’s lawsuit over disclosure of bonuses paid to Merrill Lynch employees during the takeover. The case is causing some concern among the boardrooms and executive offices of public companies because of its focus on the personal responsibility and liability of individual managers, rather than the corporation as a whole.

Bank of America had negotiated a settlement with the SEC, but Judge Jed Rakoff of the District Court for the Southern District of New York rejected the settlement on the grounds that it does not hold the individuals involved in the situation accountable.

The panel for this session – made up of Steven Davidoff, professor at the University of Connecticut School of Law; Seth Levine, partner at Foley & Lardner; and Simon Lorne, chief legal officer at Millennium Management – explained that a judge overturning an SEC settlement is a rare event and as such, the result is difficult to predict.

Participants and panelists alike questioned Judge Rakoff’s motivation in the case, with one panelist remarking: ‘It can only be described as a terrible mess. Everyone wants out of it except for Judge Rakoff.’

Fully accountable

The situation may not be that simple, however; the last few years have seen a growing appetite among private litigants and the plaintiffs’ bar for bringing cases against specific individuals as well as the corporate entity. As one participant observed during the table discussion: ‘The government and individuals are seeking to find ways to hold management and directors more personally accountable, and this case, no matter how unlikely it is to succeed, is apt to embolden them.’

One issue raised by a number of those present was the impact this case might have on directors’ and officers’ liability insurance. There was no clear answer, although there was some discussion about the need for expanded personal coverage beyond what is traditionally available. This may not be enough because, as one participant pointed out, some prosecutors and judges are demanding that insurance coverage not be made available for use in paying penalties.

With the annual meeting season and proxy proposal deadlines approaching, these issues will no doubt continue to be the focus of intense debate. Best practice will evolve over time but, depending on the timeline of regulatory implementation, some firms may need to respond swiftly. Many think tank participants may wish to liaise with groups like the SCC to influence the direction of future regulation.

Members of the Shareholder Communications Coalition