Sunday, October 18, 2009

Great change in US Corporate Law: Rights heavily weighted in favour of top corporate executives, is now shifting in the direction of shareholders

With public pressure boiling over, investors are on the verge of getting a greater share of the rules governing company directors -- or at least a bigger say in the changes that are made. These all are due to the biggest financial crisis since the Great Depression, coupled with Bernard Madoff's $50 billion Ponzi scheme and ire over Wall Street bonuses has lit a fire under Congress and the nation's investor watchdog, the Securities and Exchange Commission.
SEC is undertaking an array of actions to empower investors in their interaction with managements and boards. That includes new powers which could make it easier for investors to oust chief executives and other management-backed directors. Now investors could have an easier and cheaper way to nominate director candidates to boards -- a policy sure to transform shareholder-board relations.
New law provides more power to investors seeking to oust CEOs from boards will be more effective due to new SEC rules prohibiting so-called "ballot-stuffing," the long-held practice of broker-dealers casting undirected retail investor votes for management director candidates.
These are major steps. The SEC has discussed giving investors a more central role in corporate director elections for decades, to no avail. But the credit crunch has given weight to arguments that corporate boards must be more accountable to shareholders, driving this round of reform efforts.
Now there is a huge increase in the amount of rights that shareholders have as a result, the playing field, so heavily weighted in favour of top corporate executives, is now shifting in the direction of shareholders, including retail investors, public and corporate pension plans, hedge funds and other institutional stockholders.
It is expected that new powers to result in greater behind-the-scenes negotiations between investors and corporate boards, as directors seek to avoid embarrassment by privately negotiating with shareholders over pay packages and other policies.
Many reforms have already taken place. Others are still under consideration on Capitol Hill and at the SEC. Strengthening shareholder rights, anticipates that much of the investor-friendly legislation on Capitol Hill will be approved. The proposed changes are part of a broad movement that is transforming shareholder-corporation relations in a post-financial crisis period.
Here are initiatives underway in Washington aimed at empowering shareholders in dealings with corporations and their boards: Giving shareholders an easier way to nominate a minority slate of directors has been on and off the agenda at the SEC since the 1940s, but has never come to fruition. Most recently in 2004, under the helm of then SEC chairman William Donaldson, efforts to give investors more power in board elections failed to gain traction. Despite the long odds, the winds are shifting, said David Sirignano, partner at Morgan Lewis & Bockius in Washington, and former chief of the SEC's M&A office. The vast majority of investors, particularly retail shareholders, have a tough time influencing how corporations operate. That is changing. Both Congress and the SEC are taking steps to give investors a non-binding but powerful vote on the compensation of executives. The SEC has drafted a rule expected to be approved before year-end that would subject financial institutions receiving bank bailout funds to a shareholder vote on the pay of their executives. Moreover, a key congressional committee has approved a provision -- which is expected to become law later this year as part of broad bank reform legislation -- that would apply this measure to all U.S. corporations.
Corporations in the U.K. are subject to the same salary rule, it is expected that in the U.S. it could drive management and board compensation committees into behind-the-scenes negotiations with investors over corporate pay.