Transcript www.rrdonnelley.com

Governance Issues for 2010
Corporate Governance
Presenter:
Lizanne Thomas
Chair, Global Governance Practice
Jones Day
2010 RR Donnelley SEC Hot Topics
2010’s Governance Word of the Year
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The Evolution of Corporate Governance
Original
Framework:
Laissez Faire
The 1980s:
Transactional
Justification
The 1990s:
Bull Market
Blindness
•Business
judgment rule
•Pace of M&A
created
contours to
the business
judgment rule
•Quiet shift
toward
focus on
independence
•Federal
disclosure
requirements
arose from
1929 market
crash
Late 90s, Early
2000s: One
Size-Fits-All
Mid-2000s:
Primacy of
Shareholder
Activism
•After the DotCom •RiskMetrics/
ISS as
Bubble,
transparency and influencer
accountability
•Hedge
funds as
•Suggestions •SOX/SEC/NYSE
drivers of
of affirmative rulemaking –
change
obligations
federalization of
corporate law,
•Decreased
round 1
incumbent
•Increased Board board
leadership
burden
2010 RR Donnelley SEC Hot Topics
Today: Market
Implosion;
Government
Rescues
•Antimanagement
bias; focus on
compensation
•Federalization
of corporate
law, round 2
•Risk focus
3
Enactment of Dodd-Frank Act
 The 2008-2009 Financial Crisis unleashed political populist anger at
Wall Street and Corporate America generally
 Compensation arrangements that allegedly encouraged excessive risktaking were said, without sufficient empirical evidence, to be primary
causes of the Crisis
 Politicians, pundits and the “shareholder industry” took advantage of
this to promote an agenda to move toward “corporate democracy,” and
away from the Board-centric governance model that was the hallmark of
the 20th Century
 The Dodd-Frank Wall Street Reform and Consumer Protection Act was
enacted on July 21, 2010
 Many provisions require additional action
• SEC rulemaking
• Exchange listing standards
 Nonetheless, many provisions will apply in 2011 proxy season
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What’s at Stake?
 Misguided shift to “shareholder democracy model” in an era of
trading, not investing
 Fundamentally different than SOX, encourages short-termism at
the expense of stability and long-term growth focus
 Union and other special-interest groups, hedge funds and
activists will nominate directors who threaten Board cohesion,
even with the 3% and three-year hold rule requirements
 No-confidence say-on-pay votes
 Clawbacks of executive pay
 Forced changes in compensation committee members
 Expanded SEC staff and budget: more enforcement
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Advisory Say-on-Pay Votes
General
Requirement
 Requires periodic advisory shareholder vote on
executive compensation
– Must be held at least once every three years
– Shareholders determine frequency of vote at
least every six years
Effective Time
 At first shareholder meeting held on or after
January 21, 2011 shareholders must vote on:
– Say-on-pay resolution; and
– Resolution on frequency of say-on-pay vote
Implications • Although say-on-pay votes are advisory and not
binding on board, implications expected:
– Investor relations issues
– Consequences under RMG/ISS voting policies
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Proxy Access
General  Expressly authorizes SEC to prescribe rules and
regulations relating to proxy access
 SEC approved final rules on August 25th (3-2 vote)
 Final rule includes 3% ownership threshold and
three-year holding period
– Proposed rule had sliding 1-5% threshold and
one-year holding period
 Not available to those that seek a change in control
 Requires nominations to be submitted at least 120
and no more than 150 days prior to the anniversary
of previous year’s mailing date
 25% cap on number of seats that investors may seek
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Clawback Policies: Substantial Expansion of SOX
Must enact a clawback policy that applies if accounting restatement
is due to material noncompliance with any financial reporting
requirement of securities laws.
SOX
Dodd-Frank
 Only authorizes SEC
enforcement actions
 Applies only to CEO and
CFO
 Provides for private right of
action
 Applies to all current or
former executive officers
 Restatement must be result  Does not require any fraud
of misconduct
or malfeasance
 Twelve-month look-back
period
 Three-year look-back
period
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Limitations on Broker Voting
General  Prohibits uninstructed broker voting on any
Requirement
proposal:
– To elect directors;
– Relating to executive compensation; or
– Any other “significant matter,” as determined
by SEC rulemaking
Effectiveness  Immediately upon enactment
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Additional Requirements
 Advisory Votes on Golden Parachutes
 Expanded independence requirements for compensation
committees
 Explanation of Board leadership structure
 Internal pay equity ratio
 Pay for performance assessment
 Policies against employee and director hedging
 Whistleblower provisions
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SEC Enforcement Expansion
 Conditions are ripe for even more activity going forward
•
•
•
•
Public pressure stemming from Madoff, BoA, etc.
Specialized FCPA enforcement unit
Increased budget
New Aiding & Abetting standard in Dodd-Frank
Whistleblowers Renaissance
 New provisions of Dodd-Frank incentivize whistleblowers to
report externally to government
• “Original” information
• Resulting in sanctions of more than $1 million
• Whistleblower award of 10-30% of sanctions in SEC discretion
• Plaintiffs firms are gearing up
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What to Do:
Take a Positive Approach -- Now
 Annual meeting is now a political campaign to be won
 Proxy disclosure must both inform AND influence
 Prepare the board and management (especially IR/PR)
 Identify potential challengers and invigorate shareholder outreach
 Reassess board’s abilities and profile
 Rethink compliance/whistleblower policies – reinforce tone from
the top
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