ON Securities : Securities Lawyer & Attorney for Corporate Governance & Executive Compensation Matters

As I said in this previous post, Broc Romanek, the editor of theCorporateCounsel.net and writer of the associated blog, spoke in Minneapolis recently at a meeting of the local chapter of the Society of Corporate Secretaries and Governance Professionals. Broc spoke effectively about the expanding use of social media, and the need for all of us to get more familiar with the new technology.

To paraphrase, don’t reject Twitter just because it was the medium used in “Weinergate”, or just because some Twitter writers think you are interested in their latest stop at Starbucks. If you are not following social media, you are missing out on an important new source of corporate news. Institutional investors are reading tweets, and a majority of IR departments are on Twitter. See Broc’s post from earlier this year, “Time for You to Consider Tweeting? The IR Pros Are....”

The point is, you owe it to yourself to get at least a passing familiarity with social media, especially Twitter. So how should you get started if you’ve never tried it? Here are some of Broc’s suggestions (mixed in with some of my own) from his segment called “How (and why) to become a power social media user in 15 minutes”:

• First, go to Twitter.com and set up your account. Choose an account name or “handle,” probably based on your name. Mine is MartinRosenbaum.
• Use the search bar at the top of the Twitter page to find a few people you want to follow, and then hit the “Follow” button. For example, take a look at the pages for Broc Romanek, Doug Chia and Lisa Lentini (the latter two are in-house corporate governance professionals who are very social media-savvy). You’ll see a combination of short news items with links to web content (each “tweet” is limited to 140 characters) and commentary on business and occasionally non-business matters. For each person you follow, you can see a list of whom they follow and who follows them, which can give you more ideas about people you might want to follow. Some of the people that you follow may also start to follow you.
• Once you are following a few people, you will be able to view a string of tweets – your own personal news feed. Broc suggests that you organize them by going to TweetDeck.com and downloading the TweetDeck application for your computer or tablet. You can also see a string of related tweets on a particular topic when you click on a term in a tweet that starts with a “hashtag”, such as #SayonPay.
• To look at tweets about your company, try entering the company name or trading symbol in the search box. Or, register for StockTwits, a service recommended by Broc. This is one of several sites that track company information and trading information through social media like Twitter. This technology is now facilitating social trading, where financial investors rely on social media-generated information to make trades.
• Once you feel more comfortable with the process, you can try a few tweets yourself. A good way to start is to “retweet” the posts of others that you find interesting – essentially, someone else’s tweet is sent to your network of followers.

If any of you have other suggestions you want to share, post a comment or send me an e-mail (I’ll do an anonymous comment or mention the suggestion in a future post.)

Good luck and happy tweeting.

Graphic: Flickr

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Broc Romanek, the editor of theCorporateCounsel.net and writer of the associated blog, spoke in Minneapolis last week at a meeting of the local chapter of the Society of Corporate Secretaries and Governance Professionals. His main topic was “Post-Proxy Season Wrap-Up,” and Broc gave practical advice on dealing with Say-on-Pay and other governance reforms during the remainder of this proxy season and in preparation for next year. He also talked about technology developments and offered some predictions on the impact of social media on investor relations.

There were several good takeaways from the program. How do I know? I was surrounded by in-house counsel, and I tried to take note of the times when everyone picked up their pens and scribbled notes on the handout. Here’s my list:

• One big lesson: engagement with institutional shareholders is really difficult, especially for smaller companies that may have trouble getting their attention. This will continue unless and until the investors beef up their staffs big-time. How to deal with the issue? After proxy season is over, contact your big investors and ask how they want to be contacted (if at all) in the future. Get a dialogue going now.
• The shareholder advisory service ISS has issued negative recommendations on Say-on-Pay for around 12% of companies so far this year. In other words, ISS has been friendlier to boards and management than many expected. ISS’s future direction is a little uncertain – the company has been sold several times, and Broc reported that it’s on the block again. But public companies shouldn’t wish for ISS to “just go away” unless it’s clear that any leading alternative would be better.
• Companies need to be more careful about how they count the votes on Say-on-Pay and other matters. Broc cited data to the effect that a large percentage of companies are making mistakes in counting the votes (e.g., how will abstentions or broker non-votes be counted in determining whether a proposal was passed). Some companies are counting the votes in a way that does not match corporate bylaws and state corporate laws. Further, in some cases the voting results, as reported in Form 8-K, are not consistent with the previous proxy statement disclosures about how the votes would be counted. He urged professionals to double check the standards and the numbers.
• Several companies have been sued after negative Say-on-Pay votes, with the complaint citing the vote as evidence of a breach of the board’s duties. The lawsuits may well be groundless, but boards of directors of these companies are reacting very strongly. Be sure to warn the board of the possibility.
• Pay more attention to the investor relations page on your company’s web site. Company web pages are becoming more influential. Broc cited the writings of Dominic Jones on the IR Web Report blog, see “Stats show PR wires less effective than company web channels.” Google your company name and “executive compensation” and note the top 10 results – this provides clues about who is controlling the narrative. In this regard, pay attention to search engine optimization. For example, if you have an IR web page with “executive compensation” in the URL, the page’s search results will be improved. Keep tabs on services that make it easier for people to access your company’s information and provide feedback from mobile devices – soon, nearly everyone will be using tablets.
• Broc expects shareholders meetings to become more like political campaigns. In a recent New York Times article, “Inciting a Revolution: The Investor Spring,” Gretchen Morgenson reported on a movement among the smaller shareholders of Celgene Corporation to organize a negative Say-on-Pay vote through social networking. Events like that are not yet common, but this is the wave of the future. Look at the IR web pages of European companies, where investor relations and shareholder meetings have been treated more like political campaigns, with video, etc.
• On a related note, company personnel need to get conversant with Twitter fast, especially since many proxy solicitors don’t “get” social media yet. Institutional investors are reading tweets, and a majority of IR departments are on Twitter. Don’t get left behind. See Broc’s post from earlier this year, “Time for You to Consider Tweeting? The IR Pros Are....”

Broc also spoke effectively about the expanding use of social media, and the need for all of us to get more familiar with the new technology. I’ll blog about this in a future post.
 

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I thought Valentine’s Day would be a great time to talk about engagement.

In this case, I’m talking about “engagement” by public companies with their shareholders. A lot of commentators these days are talking about engagement in the context of the new shareholder advisory votes regarding executive compensation (Say-on-Pay and the frequency vote) required under the Dodd-Frank Act.

In his Byrd Watch report released last week, “The Permanent Engagement Campaign for Say on Pay/Say on When Votes,” Francis Byrd of Laurel Hill Advisory Group gave a nice summary of engagement issues to be considered by public companies. After he discusses concrete steps companies should consider he describes his concept of a “permanent engagement campaign” – i.e., one that doesn’t end on the date of the annual meeting:

Once upon a time, shareholders voted in accordance with management and the logistics of the proxy vote was the greatest difficult companies faced in electing directors and approving corporate actions. Those days are gone forever. There are no routine annual meetings. Whether your SOP vote is approved by a wide or narrow margin (or defeated) you will need to maintain your engagement teams and continue on-going dialogue with your investors.

Another interesting document is the set of Global Corporate Governance & Engagement Principles published by BlackRock, a major asset manager and institutional investor. The document lists BlackRock’s general global policies for evaluating governance of its portfolio companies. I thought the interesting part was the last section, where BlackRock talks about its own internal oversight of its decisionmaking progress as it relates to voting shares. In other words, this describes how a large shareholder responds to engagement by its portfolio companies.

The New, Slimmed-Down Version of the Say-on-Pay Rules

The SEC just released the Federal Register version of its final rules on Say-on-Pay, the frequency vote and Say on Parachutes. This version, thankfully, is only 39 pages (including the cover page), compared to the 152-page beast that was available previously. Always a relief – the same useful information, but much lighter in my briefcase. On Valentine’s Day, I can once again truly say I love the SEC . . . .
 

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Effective communication. Engagement. Getting constituents to ignore the “noise” and buy in to your message. These are all important challenges faced by public companies this year as they prepare for the two new shareholder advisory votes required at their annual meetings under the Dodd-Frank Act: Say-on-Pay and the frequency vote.

These challenges are also important themes of the two best films of 2010: “The Social Network” and “The King’s Speech”. I loved both movies, although I agreed with the Golden Globes voters who gave “Social Network” the Best Picture nod last night. But I hadn’t focused on the connection between the two films until I read “Top Two Films Offer Lessons on Life and Media”, a very insightful commentary in the Minneapolis StarTribune by editorial writer and media commentator John Rash. As Rash points out, both films address the challenges of connecting with people in a new age of media:

In “Social Network”, the main character’s personality and his approach to relationships create difficulties in his business and personal dealings. Nevertheless, he finds a way to tap into the basic human desire for connection, creating a medium that has been adopted by 500 million (and counting) people.

In “King’s Speech”, the advent of radio presents a daunting challenge to a new king afflicted with a stammer. His ability to communicate with the masses ultimately depends on his personal friendship with a commoner from Australia.

As Rash puts it:

The Internet, and in particular social networks, have accelerated the rise of personality over policy. . . .

Ultimately both films are fundamentally about friendship - about how it's human, not wireless, connections that count. . . . Both films show how human bonds can be built or broken by the new challenges and opportunities of the new media age. Either way, the results are often consequential . . . .

Interesting observations. So can the films teach any lessons to public companies facing shareholder advisory votes for the first time? Maybe that, even in an age of new media, personal connections will continue to be important - possibly more important than ever. I’m working with numerous companies that are starting to worry about convincing large shareholders to support the company’s recommendations. Much of this process will be done one-on-one, through meetings and phone calls rather than over the Internet. The personal touch may be one way to combat negative feelings about corporate governance and executive compensation, fueled by the new media in the past couple of years.

One way or another, if you haven’t seen both films, don’t miss them.

The Big 1-0-0!

As I enter this post into the ON Securities website, the site tells me that this is the 100th post! The past year and a half has been an eventful period in securities law, corporate governance and executive compensation for public companies, and I have enjoyed the opportunity to comment on these events and get feedback from readers. During the time frame for the next 100 posts, and beyond, the developments should be just as interesting.

In this earlier post, I commented on another very good film: “Julie and Julia”. This was not only a well-acted portrait of Julia Child and a modern day follower, but it was also the first mainstream movie about blogging. As I said in that post, I welcome your continued feedback and hope the blogging process can be a two-way street.

Thank you for reading.
 

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Just In Time For Thanksgiving - The Compensation Turkeys of the Year!

At Thanksgiving, our thoughts naturally turn to gluttony of all sorts. So it seems like a fitting time to recognize a few companies for granting awards to their executives that look so ridiculous they practically beg Congress to speed up compensation reform. A great place to look for these examples is the footnoted.org blog, which prides itself on posting the interesting stories "found in the footnotes" of SEC filings.

So pass the cranberry sauce and gravy, here are my nominees for the "Compensation Turkeys of the Year", all reported by footnoted.org in the past few weeks:

Of course, Goldman Sachs makes the list for its announcement that it is setting aside around $17 billion for compensation and bonuses, calculated to be more than $700,000 on average for each of the company's 31,700 employees. I blogged about this last month. The bonuses are based on Goldman's financial results for the current year, and commentators disagree on how much the results were enhanced by the government bailout of AIG and other financial companies.

Allis-Chalmers reported recently that healthcare benefit premiums and expenses for its CEO exceeded $72,000 last year. (That buys a lot of aspirin.)

Microsoft announced that, for one new executive, they paid a relocation allowance of $4.1 million, and a related tax gross-up of $1.2 million.

These aren't the only examples of compensation that grab your attention, but they are just the most recent obvious ones. As Mark Borges pointed out at the NASPP Annual Conference and other presentations, when companies eventually are required to have advisory votes on executive pay (Say-on-Pay), most companies' compensation will be approved. However, to prevent a "no" vote, they will need to think about the compensation practices that appear the most excessive - personal use of corporate jets, tax gross-ups, etc. It will be interesting to see whether, in a couple of years, after compensation reform, the Compensation Turkeys of the Year will be extinct birds. Don't count on it.

If you have any other Compensation Turkeys of the Year you would like to report, send me an e-mail. (As with any other good whistleblower policy, I won't use your name unless you give permission.)

By the way, the picture above shows the family of wild turkeys that hung out in our back yard for the past few months. Leading up to Thanksgiving, though, I haven't seen them lately. Times are tough.

Anyway, have a fantastic Thanksgiving!

RiskMetrics Update

Last week I reported that RiskMetrics Group came out with its 2010 updates to its proxy voting guidelines, summarized here. The compensation policy has changed more in form than in substance from last year, integrating separate policies into a single policy. RiskMetrics also clarified its methodology when it has compensation-related recommendations for a company based on its analysis. If that company has a Say-on-Pay proposal on the ballot, RiskMetrics will generally apply its recommendations to that resolution. However, if egregious practices are identified, or if a company previously received a negative recommendation on a Say-on-Pay resolution and the issue is not resolved, RiskMetrics may recommend a withhold vote with respect to compensation committee members.

The new governance policy also changes RiskMetrics' standards when making recommendations with respect to shareholder rights plans and revises its director independence standards.

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Several new reports have been published that provide valuable information about what's going on in the public company world. Here are two that just came out:

Pearl Meyer & Partners released a survey report covering companies' attitudes toward Say-on-Pay, which is currently required for TARP recipients but will not be required for other public companies until at least 2011. The survey found that most respondents were not very concerned about Say-on-Pay and are not yet taking specific steps to plan for shareholders advisory votes. The Pearl Meyer firm reports that virtually all advisory votes have passed, mostly by a sizeable majority. However, the firm cautions that institutional shareholders may get tougher on Say-on-Pay votes in the future. The survey report recommends some specific steps companies can take over the next several months to plan for Say-on-Pay.

Frederick W. Cook & Co. released a report of its study of non-employee director compensation at the 100 largest New York Stock Exchange companies and the 100 largest Nasdaq companies. The study found that compensation levels generally stabilized in 2009 after several years of increases, which had tracked increased director responsibilities under the Sarbanes-Oxley Act of 2002. The study also found that the compensation mix changed, with more companies moving director equity awards out of stock options and into stock awards. Also, the declines in the equity markets had a significant impact on equity award values, especially at Nasdaq companies. The study outlines median compensation levels at these companies and examines a number of compensation practices.

One more update - hot off the presses: I noticed that RiskMetrics today published some of its 2010 policy information, which applies to all shareholder meetings occurring on or after February 1, 2010. The more comprehensive proxy voting guidelines will be published in December. However, the just-released documents shed some light on RiskMetrics' evaluation of compensation and governance practices for the 2010 season. It appears that RiskMetrics will make some changes to its approach in making recommendations on Say-on-Pay votes and other compensation-related votes. I will report further on this next week.

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Early November finds us in a kind of limbo - those of us who advise public companies on governance and compensation matters are waiting for something big to happen. But there's plenty of smaller stuff to report on - although most of these items present more questions than answers:

Proxy Disclosure Rules. On November 4, SEC Chairman Schapiro gave a speech addressing current regulatory developments. She described the proxy disclosure rules but did not address when they would be adopted or considered. The Corporate Counsel Blog reports that the rules will not be adopted on November 9, as previously rumored. However, there is still a chance that the rules will apply for the 2010 proxy season. If so, there won't be much time to evaluate the rules, or to hold a compensation committee meeting to address the new disclosures. Stay tuned. . . .

Proxy Access. Rep. Maxine Waters has proposed an amendment to the Investor Protection Act of 2009 (the current provisions of the Act are described in the ON Securities Cheat Sheet). The amendment would require the SEC to adopt rules permitting large shareholders to nominate directors in the company's proxy statement (proxy access). If added to the Act and ultimately adopted, this provision would enhance the SEC's position in adopting its proposed Rule 14a-11 granting proxy access.

Say-On-Pay and Shareholder Surveys. Companies continue to conduct annual advisory votes on compensation on a voluntary basis. Meanwhile, as reported by the Corporate Counsel Blog, some companies, including Schering-Plough, have begun to survey their shareholders. This will provide more detailed data on shareholders' opinions about compensation practices and may emerge as an alternative or supplement to simple yes-or-no advisory votes.

New York Power of Attorney Law. You may have read about the amendments to the New York power of attorney laws, effective September 1, 2009. See this Forbes article. The amendments impose strict requirements (font size, notarization, etc.) for powers of attorney, particularly those signed in New York by New York residents. The amendments have prompted a flood of articles and analyses, including speculation that the requirements could affect the validity of powers of attorney for SEC registration statements, Section 16 filings, etc. I agree with this analysis, indicating that, even though there is no definitive guidance, the validity of powers of attorney for SEC filings should be governed by SEC rules and not state law.

I should get updates on some of these items next week - I'll be attending the NASPP Annual Conference in San Francisco. Of course, I can't wait to share the information with the ON Securities readers. There may even be a tweet or two, if you can't wait for the Blog.

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More Risky Business - A Case Study in the Risk Aspects of Compensation

There was a fascinating article in the New York Times on Thursday about Merrill Lynch's 2006 bonus program, which resulted in large payouts to top management even as the company was sold to Bank of America in a distressed sale. The author of the article provides more in-depth analysis in a post in the Times' DealBook Blog. Of course, these pieces probably attracted my attention because the DealBook post starts with "Calling all compensation nerds".

The Times article lays out the ways in which the Merrill plan was supposed to align top management pay with long-term performance, but concludes that the plan "did not keep workers from taking risks that nearly sank the brokerage giant. And some of its senior executives still stand to collect millions of dollars in stock under the plan." The Blog post discusses the features of the plan that put a portion of the employees' bonuses at risk, provided for a partial clawback if return on equity was not adequate, and invested the bonus amounts in stock that was locked up for a year past the three-year term of the plan.

While the article itself focuses attention on the failings of the Merrill plan, the Blog post provides a more nuanced view of the effort put into structuring the program, and the reasons it may not have been fully effective:

The Bottom Line: Talk to people who were in the plan, and they will tell you it worked because Merrill executives lost money in the clawback in 2007 and also because of the sunken stock price. However, the executives all did better than regular investors who put in money at the same three points but did not have the firm's leverage to help. Of course, the executives work at the company, and the plan was meant to compensate them in part for that work.

Why did the plan fail to save Merrill? Some compensation experts suggested it should have been applied to far more people. Others said a single year's return on equity might not be the right metric. And others said risk management and capital rules also contributed to Merrill's problems.

I think the Merrill plan had many worthy features that should command the attention of compensation professionals, especially in the financial services industry where risk management will become the Holy Grail of compensation programs. The Blog analysis above points out that some adjustments in the Merrill program could have made it much more effective - for example, the plan should have applied to far more people. In the financial services industry, bonuses to employees at all levels fueled excessively risky practices. But just because the program didn't perfectly match investor losses with executive losses, that doesn't mean the Merrill program wasn't a worthy effort.

In-House Lawyer Bloggers - What's Next?

Here's a new one - The Corporate Counsel Blog reports that in-house corporate attorneys have joined the blogging world. For example, Doug Chia, Senior Counsel at Johnson & Johnson, is posting on J&J's corporate blog. Chia reports that he is encouraging other in-house attorneys to blog. One of his goals is to get relevant information to retail shareholders, in preparation for the next proxy season when brokers will not be able to vote without instructions from these shareholders.

What's next? I haven't seen any GC's tweeting - yet.

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I just went through some of the hundreds of comment letters on the SEC's controversial proposal to adopt Rule 14a-11 on proxy access. The rule would grant large shareholders the ability to include director nominees in management's proxy statement - see the description at the end of the ON Securities Cheat Sheet. A companion rule, a proposed amendment to Rule 14a-8, would explicitly allow shareholders to include proposals in the proxy statement to approve various forms of proxy access.

Several comment letters, including the letter from the U.S. Chamber of Commerce, describe explicit theories about why the proposed rule should be struck down by the courts if adopted. Generally, these letters claim that the rule exceeds the SEC's authority or preempts state law. One of the most interesting letters is from Stanford Professor Joseph Grundfest, a former SEC Commissioner. Grundfest focuses on the major contradictions he perceives between the SEC's stated goals in its proposing release and the provisions of the rule itself:

. . . Like Charles Barkley's claim that he was misquoted in his autobiography, contradictions spawn skepticism as to the credibility of an entire enterprise.

Professor Grundfest then describes how these inconsistencies could be the basis of a legal challenge to the rule.

It seems apparent that, if the SEC adopts Rule 14a-11, the enforcement of the rule will be tied up in court, and the rule could eventually be struck down. This leads to a couple of likely scenarios involving Rule 14a-8:

The SEC could adopt both Rule 14a-11 (with the same 3-2 vote as for the proposal) and the amended Rule 14a-8, risking a legal challenge. The amended Rule 14a-8 will serve as a backup that will almost certainly not be subject to a legal challenge. As described in this post, Delaware law was recently amended to specifically permit such bylaw amendments.

On the other hand, the SEC could back down and just adopt the proposed amendment to Rule 14a-8 (possibly with a 5-0 vote). This is the compromise suggested by the National Association of Corporate Directors, which opposes Rule 14a-11 but supports the amendment to Rule 14a-8.

Either way, the amendment to 14a-8 is likely to be effective long before Rule 14a-11. This will give activist shareholders an avenue to start the process of demanding shareholder access through shareholder proposals at annual meetings to amend company bylaws. One way or another, it won't be long before we hear the big shareholders "knock-knock-knockin' on the boardroom door".

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I've been working on my outline for an upcoming continuing legal education program on how in-house practitioners can avoid or minimize securities fraud liability. I talked to Maslon's securities litigation partner extraordinaire, Rich Wilson, about the topic, and we came up with the following tips:

The simple rule is to disclose material information in a way that's not misleading. However, Rich cautions that a higher standard of disclosure may be required now. As Rich puts it, "There is a growing public skepticism that will make its way into the jury pool and even into the judiciary. In a dispute, a tie may no longer go to the company." SEC enforcement also poses new dangers, because the agency has a beefed-up enforcement staff and new energy. In other words, business as usual may not be the best course in the current atmosphere.

Also, in the current climate, process and consistency become increasingly important. Companies should take a fresh look at their disclosure controls and procedures. The CEO and CFO have to certify the adequacy of these procedures every quarter in the 10-K and 10-Qs, but now is the time to make sure the procedures still make sense and are being followed consistently. This increased emphasis on compliance has to be maintained, even at a time when a lot of companies are cutting back on their in-house legal and compliance staffs due to economic considerations.

It is also important to minimize the possibility of inconsistent disclosures by multiple individuals, and leaks of material non-public information. The company should have a clear written communications policy to ensure that corporate disclosures are made consistently by authorized spokespersons, and to prevent leaks. Again, the company should monitor and enforce consistent compliance with the policy.

It is also very important to consistently monitor and enforce compliance with the company's insider trading policy. If insiders appear to be trading in the company's stock before allegedly material information is disclosed, this will greatly increase the risk of a lawsuit or SEC enforcement proceeding, compared to a disclosure-based claim alone.

All good tips. Although, maybe not as good as the tip my law school buddy used to give me: "Don't get caught cheating". Yes, he was kidding. Or maybe not - he ended up getting elected to Congress.

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How to Play Say-on-Pay

It's a pretty good bet that non-binding shareholder advisory votes on executive compensation ("Say-on-Pay") will be adopted this year and will become mandatory for public companies, probably starting with the 2010 proxy season. There are several different pieces of proposed governance reform legislation in Congress, and virtually every one of them would, if adopted, require Say-on-Pay. See the ON Securities Cheat Sheet for details. If Say-on-Pay becomes a reality, this would be in line with the prediction I made in my StarTribune Business Forum commentary last April.

So, what does Say-on-Pay look like in practice, and what is the likely outcome of the shareholder vote? A recent alert by Compensia, a compensation consulting firm, gives a good summary of the proxy statement language used by various companies and the reported results to date. So far, very few companies have reported the results of advisory votes, but in most cases the resolutions approving compensation have passed by wide margins. We should see the reported results of many more votes soon - hundreds of financial institutions that received TARP funds were required to conduct advisory votes in the past few months. The results of most of these votes will be reported in 10-Qs over the next few weeks, and we should get a clearer picture of the atmosphere for these proposals, especially within the financial services industry.

Assuming Say-on-Pay is required to be on the ballot in 2010, what should companies do now? At the very least, companies should start planning early to review their proxy statement disclosures, including CD&A, to address concerns that institutional investors are likely to raise. I recommend reading the RiskMetrics 2009 report, "Evaluating U.S. Management Say On Pay Proposals" (note: you will need to create a free RiskMetrics account if you don't already have one). This report outlines a set of factors that RiskMetrics advises investors to consider in evaluating an advisory vote. Expect RiskMetrics to come out with a more specific set of guidelines in preparation for the 2010 proxy season. Compensia, in its alert, also recommends planning a program of shareholder communications regarding compensation matters.

Another resource is the Say-on-Pay web forum, sponsored by Corporate Secretary magazine, which looks like it will be providing ongoing analysis of Say-on-Pay votes.

What is your company doing to get ready for Say-on-Pay? How much of a pain will it be? Post a comment below or send me a confidential e-mail.

Updated Cheat Sheet Posted

We have just posted an updated version of the ON Securities Cheat Sheet under the Resources listing on the home page of this Blog. The updated document describes the Corporate Governance Reform Act of 2009 introduced by Minnesota's own Rep. Keith Ellison. The Cheat Sheet also reflects the actual introduction of the bill previously proposed by Treasury Secretary Geithner and now introduced by Rep. Barney Frank.

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As described previously, on July 1, 2009, the SEC approved by a 3-2 vote an amendment to New York Stock Exchange Rule 452 to eliminate broker discretionary voting in uncontested elections of directors. Of all the recent proposals (see the ON Securities Cheat Sheet), this was the first to be adopted, and this change may have the biggest practical impact on corporate governance for most companies. The rule change is effective for shareholder meetings held on or after January 1, 2010, and it is likely to make it more difficult to get affirmative votes in favor of management's slate of directors.

So for management of a public company, is this your worst nightmare? Maybe it's a little early to start screaming. But at the very least, it's not too early to do some advance planning to avoid surprises for the board. And for the in-house attorneys I work with, it's always a good idea to avoid surprises for the board. Or you WILL have something to scream about.

So what should a company do to prepare? Georgeson, a leading proxy solicitation firm, recently did a good explanation of the possible impact of the amendment, including three main tips:

Analyze - run some numbers to determine the possible impact of the amendment on your next election, including the possible impact of factors that might lead proxy advisory firms like ISS/RiskMetrics to recommend a vote against the incumbents.

Communicate - develop a communication plan to educate retail investors on the importance of voting and a last-minute "get out the vote" campaign, just in case.

Prepare - develop a damage control plan in case of a large percentage of negative votes (or a failed election, in the case of a company that has adopted majority voting for directors).

I talked to one in-house attorney who has started to run analyses of historical vote patterns to predict how the next election will come out. What is your company doing? And how much impact do you think the amendment to the broker voting rules will have? Post a comment below or send me an e-mail.

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