As if the existing (and growing) compliance burden wasn’t sufficient and banks didn’t have enough non-revenue-producing government oversight issues to deal with, Washington is quickly coming up with a plethora of new and expanded disclosure and shareholder access requirements for publicly-held institutions that will add further non-revenue-generating cost, complexity, confusion and liability to the governance process. Pending federal legislation and SEC rules may well add to the mix through proposed expanded federal governance and shareholder proxy access requirements. The new legislative and SEC proposals are in addition to the still-evolving burdens associated with Sarbanes-Oxley and evidence a desire and willingness of certain members of Congress and the Administration to endeavor to “federalize” areas of corporate law in direct contrast to the long-standing state corporate law structures.
All of this is on top of the already-staggering regulatory burden for banking institutions.
The proposals make it all the more attractive for non-public institutions to endeavor to avoid “shareholder creep” and remain non-public and for public institutions to seriously consider going “dark” and take steps to de-register if appropriate. It also is likely to make it all the more challenging for banks and other corporate issuers to secure access to capital at the very time it is most needed.
In the current economic business and political environment, these things were bound to happen. As we have seen time and again, however, bad facts make bad law. More of these kinds of proposals are unfortunately likely to arise before the dust settles
The Shareholder Bill of Rights Act of 2009 (SBRA)
The SBRA, introduced by Senator Charles Schumer (D-NY), includes “say on pay” shareholder advisory voting on executive compensation and directs the SEC to modify rules to enhance opportunities for shareholder board nominations. The SEC in response has issued proposed rules that are somewhat different from those anticipated by the SBRA but are consistent with significantly enhanced disclosure obligations and enhanced shareholder access to the proxy process.
The SBRA would greatly increase direct and indirect shareholder participation and authority with regard to executive compensation matters and director elections. It would require such things as shareholder approval for “golden parachute” arrangements, shareholder approval of certain executive compensation packages generally, greatly increased shareholder access to the company’s shareholder solicitation/proxy process, “independent” board chairpersons, annual director elections (eliminating staggered boards), majority voting for directors in uncontested elections and plurality voting for contested elections, resignation of directors who lose uncontested elections, establishment of board “risk committees,” and a plethora of other disclosure and shareholder activities.
Some of the proposals would result in non-binding “advisory votes” by shareholders, but issuers would be required to disclose why they choose a non-binding “advisory” structure rather than direct shareholder control, resulting in pressure on issuers to in fact make those matters binding.
Lengthy and complex SEC rules to implement the concepts contained in the SBRA have been proposed, including certain de minimis share ownership requirements for those shareholders desiring to take advantage of the enhanced shareholder proxy access process. Many commentators have noted that the proposal on its face provides a “one size fits all” process that will be extremely detrimental to American business and access to capital for issuers.
SEC and Listing Exchange Actions
Additional SEC proposals (and relevant listing exchange rule changes) are likely in the very near future with regard to, among other things, enhanced disclosure requirements regarding director business experience, board governance and leadership structures, risk management and executive compensation.
The proposals are not finalized and will likely face some level of objection particularly as they attempt to “federalize” corporate law and override long-held notions of corporate law as the province of state legislatures. However, the reality is that these kinds of things are likely to continue to be proposed in the current environment, and some form of additional disclosure and shareholder burdens, is very likely to canbe imposed on public issuers, and perhaps even non-public companies, through the regulatory process.
As Congress rushes to formulate a political response to the current economic issues it risks creating another monster that will result in further short-term investor focus, confusion, significant additional non-revenue-producing expense and disincentives for capital at the very time those kinds of things are most harmful and provides obstacles to a recovery.
Institutions that are not “public” should take care to make certain that they do not inadvertently find themselves subject to SEC registration as a result of “shareholder creep.” Public institutions should examine whether there may be even more reason to consider alternatives to “go dark” if that option is appropriate and within reasonable reach. Institutions that intend to remain “public” should be watching the situation closely in order to assure compliance with the legislation and rules as appropriate.