RECENT DEVELOPMENTS AND PROPOSALS

IN CORPORATE GOVERNANCE IN THE

UNITED STATES
Wendy Semel
Debevoise & Plimpton LLP

MAJOR AREAS OF REFORM AND PROPOSALS

Board Governance

Chairman Independence

Director Elections

Staggered/Classified Boards

Board Risk Committees

Shareholder Proxy Access and Proxy Disclosure

Executive Pay Disclosure and Compensation Rules

James C. Scoville

MAJOR AREAS OF REFORM AND PROPOSALS

Unlike many other jurisdictions, US has no single body or statutory regime

regulating corporate governance
Regulation of corporate operations is primarily a function of state law,
which traditionally has taken a flexible approach
US Federal law historically focused on disclosure
Current bills continue trend started with Sarbanes-Oxley Act of using
federal securities law to regulate corporate governance
Some laws seek to impose change (i.e., SEC may not register company
that doesnt adopt specified reforms); some seek to encourage change
through disclosure
While the motivation for many of the reforms was perceived deficiencies of
corporate governance in financial firms that led to the financial crisis, many
of the changes will affect all domestic companies registered in the US
But not, generally, non-US companies registered in the US, since they
are not subject to proxy rules and many other disclosure requirements
affected by the changes

James C. Scoville

MAJOR AREAS OF REFORM AND PROPOSALS

Recent bills and rules affecting corporate governance:

Pending legislation
Shareholder Bill of Rights Act of 2009 (SBRA)
Restoring American Financial Stability Act of 2010 (RAFSA):
Wall Street Reform and Consumer Protection Act of 2009

SEC rule-based activity on proxy access and compensation disclosure

Delaware law changes on proxy access

James C. Scoville

BOARD GOVERNANCE
Areas of Focus:

Chairman Independence

Director Elections

Staggered/Classified Boards

Board Risk Committees

CHAIRMAN INDEPENDENCE

Previously, no requirements to split Chairman from CEO

The new rules adopted by the SEC in December 2009 (SEC Release 3461175) require the company to disclose the boards leadership structure,
including whether and why the company has combined or separated the
chairman and CEO positions and why it believes its board leadership
structure is the most appropriate for the company; if the CEO and chairman
roles are combined, disclosure is required as to whether and why the
company has a lead independent director and the specific role of such
director

RAFSA would require the company to disclose in its annual proxy statement
the reasons behind its decision to either separate or not separate the
positions of chairman of the board and CEO

SBRA would require that the chairman of the board be independent and not
a previous executive officer of the company
James C. Scoville

DIRECTOR ELECTIONS (cont.)

Directors traditionally elected by plurality vote, with usually little opposition

to Board-recommended candidates
Proposed reforms
RAFSA
Would require that directors for listed companies be elected by a
majority of the votes cast in elections
If an incumbent director receives less than a majority of the votes
cast in the uncontested election, the director would be required to
tender resignation to the board of directors. The board would
then be required to either (i) accept such resignation, determine
the date when resignation would become effective and make that
date public; or (ii) upon a unanimous vote of the board, decline to
accept the resignation and, within 30 days after such vote,
publicly disclose (a) its reasoning behind the decision not to
accept the resignation and (b) how it determined that the decision
was in the best interests of the issuer and its shareholders
In contested elections, directors would still be elected by a
plurality vote
It has been reported that the final reconciled legislation will not include
RAFSAs majority vote requirement

James C. Scoville

DIRECTOR ELECTIONS (cont.)

Broker Non-Votes
In July 2009, the SEC approved a change to NYSE Rule 452 to prohibit
brokers from voting on behalf of clients who fail to provide voting
instructions in uncontested director elections
RAFSA would require that listing exchanges prohibit broker
discretionary voting in connection with the election of directors,
executive compensation and any other matter the SEC determines to
be significant, such as say on pay and golden parachutes

James C. Scoville

SHAREHOLDER VOTE ON STAGGERED/CLASSIFIED

BOARDS

US companies generally allowed by state law to adopt staggered or

classified boards, and many do, partially as a defensive measure

SBRA would require that the SEC adopt rules prohibiting the listing of a
company that does not provide in its governing documents that each
member of the board of directors must be elected by shareholders on an
annual basis. Accordingly, listed companies would no longer be permitted
to have a staggered/classified board of directors

James C. Scoville

BOARD RISK COMMITTEES

The new rules adopted by the SEC in December 2009 (SEC Release 3461175) require companies to discuss the boards role in the oversight of
risk, including, if relevant, the role of board committees, such as the audit
committee or a separate risk committee, and whether and how risk
management personnel report to the board

SBRA would require the SEC to adopt rules prohibiting the listing of a
company that does not establish a risk committee comprised entirely of
independent directors

James C. Scoville

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SHAREHOLDER PROXY ACCESS (SEC)

SECs proxy access proposal (SEC Release No. 34-60089 (June 10, 2009)):
Proposed Rule 14a-11 creates a federal proxy access right, requiring
companies to include shareholder director nominees in their proxy
statements and forms of proxy if certain requirements are met:
Shareholder(s) must own a certain percentage of voting securities
(between 1-5% depending on market capitalization), although
shareholders can aggregate their holdings to meet the threshold
Minimum holding period of one year and must certify an intent to
hold through the annual meeting
Shareholder(s) must certify no intention to acquire control of the
board
Maximum number of nominees allowed at any given point in time
(up to 25% of the board seats)
The company may seek exclusion of shareholder nominees under the
proposed rules
Proposed amendment to Rule 14a-8 would permit shareholders to
adopt proxy access bylaws that are more permissive than Rule 14a-11
(e.g., lower ownership threshold; shorter holding period; shareholders
can nominate more than 25% of the board)

James C. Scoville

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SHAREHOLDER PROXY ACCESS (DELAWARE)

Changes in 2009 to Delaware law allow corporations to voluntarily adopt

proxy access or reimbursement bylaws (DGCL, Sections 112 and 113)
Section 112 allows bylaws requiring inclusion of shareholder nominees
in proxy materials
However, Section 112 allows for broad conditions to be placed on
proxy access rights, including limits on the numbers of nominees,
holding periods and ownership level requirements
Section 113 allows bylaws requiring shareholder proxy solicitation
expense reimbursement
Similar to Section 112, Section 113 allows for broad conditions to
be placed on reimbursement rights

James C. Scoville

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SHAREHOLDER PROXY ACCESS (FEDERAL

LEGISLATION)

Pending legislation would give the SEC express authority to adopt (or
require the SEC to adopt) proxy access rules:
Shareholder Bill of Rights Act of 2009 (SBRA):
Directs SEC to adopt process access rules
Shareholder(s) would have to own beneficially at least 1% of the
issuers voting securities for at least 2 years
Restoring American Financial Stability Act of 2010 (RAFSA):
Directs SEC to adopt process access rules no later than 180 days
after the enactment of the bill
Wall Street Reform and Consumer Protection Act of 2009:
Provides that the SEC has authority to adopt proxy access rules
It has been reported that the final reconciled legislation would just
affirm that the SEC is authorized to issue proxy access rules and that
the rules may include an exemption for small issuers
James C. Scoville

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COMPENSATION DISCLOSURE

In December 2009, the SEC adopted new proxy and corporate governance
disclosures rules (SEC Release 34-61175), requiring, among other things:
Disclosure of the companys compensation policies and practices for
any employees if the compensation policies and practices create risks
that are reasonably likely to have a material adverse effect on the
company as a whole
Use of the full grant date value of equity awards (as opposed to the
value recognized by the company in its financial statements) in the
Summary Compensation Table and the Directors Compensation Table
Additional disclosure about the background and qualifications of
directors and nominees, diversity policies related to board
membership, the board leadership structure and the boards role in risk
oversight
Disclosure about potential compensation consultant conflicts of interest

James C. Scoville

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COMPENSATION DISCLOSURE (cont.)

RAFSA would require additional proxy disclosure:

Executive compensation:
Information showing the relationship between executive
compensation and financial performance
A graphic or pictorial comparison of the amount of executive
compensation and the financial performance or return to investors
of the issuer during a 5-year period, or other period as
determined by the SEC
Disclosure of the pay disparity between the CEOs compensation
and the median annual total compensation of all employees of the
company (excluding the CEO) and the ratio of the median
compensation to that of the CEO.
Employee hedging
Disclosure of whether the issuers employees are permitted to
purchase financial instruments designed to hedge any decrease in
the market value of equity securities granted to employees as part
of their compensation

James C. Scoville

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ADDITIONAL COMPENSATION RULES

Say-on-pay requirements are included in several pending legislative

initiatives:
Annual advisory vote: Annual non-binding advisory vote on executive
compensation for named executive officers, as presented in the CD&A
Golden parachutes: Disclosure about, and non-binding advisory vote on,
golden parachute compensation arrangements with named executive
officers
Would not apply to foreign private issuers since they are exempt from
the SECs proxy rules
It has been reported that the final reconciled legislation would allow
companies to hold a say on pay vote every two or three years instead of
annually

Executive compensation clawback:

RAFSA would require national security exchanges to refuse listing to any
company that lacked a clawback policy requiring the issuer to recover
incentive-based compensation from current or former executive officers
who received the compensation during the preceding 3-year period in the
event of an accounting restatement due to material non-compliance with
financial reporting requirements; the amount clawed back is the amount
in excess of what would have been paid under the restated results
James C. Scoville

Special Master (Pay Czar) appointed in June 2009 to regulate compensation

and compensation structures for certain employees of TARP recipients
receiving exceptional financial assistance

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ADDITIONAL COMPENSATION RULES (cont.)

Compensation committee independence

Requires the SEC to adopt rules prohibiting the listing of a company
that does not establish a compensation committee comprised entirely
of independent directors

Compensation advisor independence:

The new rules adopted by the SEC in December 2009 (SEC Release
34-61175) require disclosure of fees paid to non-independent
compensation consultants
The proposed legislation would identify factors affecting the
independence of advisors to the compensation committee (including
the provision of other services to the company and fees received by
the advisor from the company)
The proposed legislation would also require the company to disclose
whether the compensation committee retained a consultant, whether
that engagement raised any conflicts and, if so, how those conflicts
were addressed

James C. Scoville

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STATUS OF PROPOSALS

The House of Representatives passed the Wall Street Reform and

Consumer Protection Act of 2009 on December 11, 2009, and the Senate
passed RAFSA on May 20, 2010; although both pieces of legislation are
currently being reconciled by Congress and should be signed into law by
President Obama in early July, the law that is passed will likely closely
follow RAFSA

SBRA was submitted to the relevant committee in the Senate in 2009; since
most bills that are submitted to committee rarely become law, it is likely
that SBRA will not become law in its current form, especially given the time
that has lapsed since it was submitted to committee; however, it is possible
that some of the proposals it includes might make it into future legislation

The proxy access rules proposed by the SEC in 2009 will likely not become
final until after the proposed new financial regulation is signed into law

James C. Scoville

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