On August 1 of this year, stockholders of Delaware corporations, of which 50 percent of all U.S. publicly traded corporations and more than 60 percent of Fortune 500 companies are so designated, were given license to adopt bylaws that allow them to suggest their own directors on a company proxy statement. Big doings in the corporate governance world. But what is arguably a much bigger development for investors, Senators Charles Schumer (D-New York) and Maria Cantwell (D- Washington) have proposed what could be landmark legislation that would establish what the senators are terming a “Shareholder Bill of Rights” – a law that would make it easier for investors to nominate directors themselves. (Representative Gary Peters (D-MI) has introduced similar legislation that he calls The Shareholder Empowerment Act in the House of Representatives.) But Schumer’s and Cantwell’s proposed legislation goes much further . . . it also:
1) Requires that all public companies hold an advisory shareholder vote on executive compensation – the so-called “say on pay.”
2) Instructs the SEC to issue rules allowing shareholders to have access to the proxy form if they want to nominate directors to the Board, as long as they have owned at least one percent of a public company’s shares for at least two years.
3) Requires directors to receive at least 50% of the vote in uncontested elections in order to remain on the Board.
4) Requires all directors to stand for re-election annually as opposed to maintaining a “staggered boards” system which Schumer and Cantwell imply insulates board members from the consequences of their decisions.
5) Requires public companies to separate the jobs of CEO and Chairman of the Board, and requires the Chairman to be an independent director.
6) Requires that public companies create a separate Board risk committee unlike today where the risk oversight effort is often steered by the audit committee.
The Shareholders’ Bill of Rights overture has emerged alongside the SEC’s effort to give shareholders greater power to nominate directors to corporate boards. Despite the fact such action would be an entirely lawful exercise of the SEC’s authority, Schumer and Cantwell’s legislation would give this proposed change “the force of law” and mitigate arguments against the extent of the SEC’s reach.
Some see the results as momentous. If the legislation passes, it “ . . . would have bigger impact than Sarbanes-Oxley,” said John Wood, Vice-Chairman of Heidrick & Struggles, an executive search firm.
And while support for the legislation from the likes of nearly 20-plus major pension funds, labor unions, and consumer groups is stalwart, the opposition is just as strident. Tom Donohue, president and CEO of the U.S. Chamber of Commerce, made comments in the July 31st edition of The Wall Street Journal that seemed to summarize the sentiments of many of the opponents.
“This sounds harmless enough, a way of giving shareholders a chance to have their concerns put to a vote,” noted Mr. Donohue. “But in reality, Mr. Schumer’s bill would give union-backed shareholders who hold a small interest in a company—as little as 1% of the shares—enormous leverage to promote their own agendas. It would require companies to allow, and essentially pay for, unions and other activist shareholders to run a competing slate of board candidates.”
Before the August Congressional recess, The Senate Banking Committee held a hearing on the Shareholder Bill of Rights. Post-recess, Senator Schumer appears more intent than ever on seeing to it that the bill passes, possibly by including it in a larger, more all-encompassing financial regulatory reform legislative package.
In the short term, the bill’s fate will continue to rest in the hands of the Senate.
Bolstering Schumer’s cause, House Financial Services Committee Chairman Barney Frank (D-MA) has indicated that he intends to press for sweeping corporate governance legislation after financial regulatory reform passes sometime in 2010.
While it is unclear if Chairman Frank will use the Schumer Bill, the Peters Bill or even his own bill to establish governance change, steady momentum continues to build (albeit at a slower pace due to the immense attention on President Obama’s health care reform package). It is too early to say what will eventually transpire with respect to the so-called Shareholder Bill of Rights, but it would appear that unprecedented, deep-seeded shareholder support is taking root.
