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Proxy Access: Time to Get Ready for Profound Changes

Recently, Sharon Merrill Associates President Maureen Wolff and I spoke on “Navigating the New Proxy Access Rules” at the NYSE Euronext’s “Building Blocks for Successful Investor Relations” conference. The event attracted great attendance from CEOs, CFOs and investor relations officers – despite some obstacles getting downtown with the Yankees World Series victory parade taking place at the same time about a block away. Some things you just can’t plan for. As a life-long Red Sox devotee, it was rather painful to hear the million-plus Yankees fans lined up on Broadway cheering for A-Rod and company. Wait ‘till next year I guess.

When investor relations practitioners get together these days, we tend to discuss the same general questions, gripes and concerns: When will we see an upturn in the economy? Why can’t we have a better understanding of who owns our stock? Will the Yankees buy another championship next year? What effect are dark pools having? But one topic that should be getting significantly more attention in the IR world is the inevitable change in shareholder proxy access. If two proxy-related proposals from the SEC are implemented, the changes in proxy access will have a profound effect on the boardroom and board/shareholder communication. It’s time to get ready.

The first set of SEC proposals deals with the rights of shareholders to nominate directors and to allow shareholder proposals to vote on nominating procedures or nomination disclosures. As of this post, the SEC expects to address this proposal in early 2010 – too late to have an effect on the upcoming proxy season.

Should this set of proposals pass as written, shareholders owning a certain level of stock for one year (1% of shares outstanding for a large accelerated filer, 3% for an accelerated filer and 5% for a non-accelerated filer) would be able to nominate their own candidates for director on the company’s proxy ballot. The shareholder would need to certify that they are not nominating directors in order to change control of the company or gain a majority of the board. Shareholders would be able to nominate one director or up to 25% of the board seats – whichever is greater.

Since shareholder nominees would be listed along with company board nominees on the same proxy, we may be looking at what is tantamount to a political campaign for the board every proxy season. And if a bill in congress to mandate the election of each board member every year passes, we could see frequent and major changes to corporate boards every year. To further confuse the issue, dissident shareholders still would have the opportunity to nominate directors on their own proxy cards.

The second set of SEC proposals deals primarily with proxy disclosure issues and we may see this pass just in time for the 2010 proxy season. This set of proposals would require enhanced disclosure about director and board nominees. Companies would need to disclose the “experience, qualifications, attributes or skills,” that qualify the director or nominee for the board and for each committee on which they sit. Their risk assessment skills, area of expertise and why their service is relevant also would need to be explained.

Another key element of the second set of proposals requires that a company explain its board leadership structure. For example, why are the CEO and chairman titles combined or separated? Whether there is a lead director and what specific role do they play? Why is this leadership structure the best for the board at this time?

Other items within this second set of proposals include accelerating the announcement of proxy election results (to an 8-K within four days), disclosure of risk relating to compensation, enhanced compensation consultant disclosures, and changes to the proxy solicitation process.

Within this blog post we only have space to review a few highlights of the proposed proxy changes, but you can review the details of the proposals to “Facilitate the Rights of Shareholders to Nominate Directors” and “Proxy Disclosure and Solicitation Enhancements” on the SEC’s website. I should note that there are also bills in Congress that would institute majority voting for directors, establish an independent board chair, mandate “say on pay” and compensation clawback provisions, among others. Congress also could act on Proxy Access bills prior to the expected SEC vote in 2010.

Many of the proposed SEC and legislative changes probably will not be in place for the upcoming proxy season. However, the winds of change in the area of corporate governance are blowing hard, and investor relations will need to play a key role in helping companies deal with the inevitable.

So what can we do now? At a high level, the answer is clearly better communication about corporate governance and the implementation of a comprehensive board/shareholder communication policy. Sharon Merrill Associates President Maureen Wolff will be offering advice on board/shareholder communication on this blog soon. This is an area of critical importance. Companies with proactive, progressive policies may avoid costly and time-intensive proxy fights, or even the loss of corporate control.

David Calusdian
Executive Vice President & Partner

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