“There is a choice to some extent between letting companies tell their own story as to what they think it is they’re doing and comparability. If you let ten companies put the numbers out in the way they want, investors will find it very difficult to compare those ten companies. Whereas if you have a standardized set of tables, investors will be able to compare those ten companies. The companies will then say, ‘Yes, but you’re not allowing us to explain why our numbers in that table are different from somebody else’s numbers in that table.’”
With new standards for financial reporting and accounting oversight in place, debate on corporate governance swung back to traditional themes of shareholder access to the proxy and influence over executive compensation.
In 2003, the SEC, led by Chairman William Donaldson and now-Commissioner Harvey Goldschmid, took up two influential rules. The first, Rule 206(4)-6, adopted in February, required registered investment advisers to vote client proxies in their “best interest,” giving impetus to the development of institutional investor activism.45
The second would have required that companies disclose information about director independence and the nomination process. This proposed rule went so far as to set thresholds for allowing director candidates nominated by shareholders to appear on the corporate ballot. It was never implemented due to conflict within the Commission.
The SEC also took a fresh look at executive compensation. From 1990 to 2002, CEO pay had risen 279%, and with a parallel proliferation of executive perquisites, the SEC and investors were not even sure that the disclosures that established that figure were correct.
Disclosure problems made accurate evaluation of market opportunities next to impossible. The SEC altered its rules on disclosure of stock options and warned companies that all compensation, in whatever form, had to be disclosed in the proxy. The SEC also provided for disclosure of other perks received by executives, and, for all but small firms, required a compensation disclosure and analysis (CD&A) in the proxy. In helping shareholders control management compensation, the SEC brought disclosure - its most venerable and least contentious tool - to bear on the subject.
These initiatives took place during another period of economic growth and era of good feelings between shareholders and management. After soaring to unprecedented heights, however, in 2008, the global financial system collapsed, dragging the markets down with it. Shareholders lost immense amounts of wealth, financial institutions forfeited nearly all the confidence of the public, and old resentments of the rich being reckless with “other people’s money” took on new life. Some assumed that, had management been held more accountable to shareholders, or had directors provided better oversight, excessive risk might have been avoided and the collapse averted. Although the veracity of these assertions could be debated, issues of governance were again in play as Congress framed remedial legislation.
The new law addressed two governance issues that had escaped the reach of Sarbanes-Oxley: proxy access and executive compensation. Included among the 2,319 pages of the 2010 Dodd-Frank Act were provisions requiring companies to hold periodic “say-on-pay” advisory votes, giving shareholders a chance to register approval or disapproval of management pay. The law also required that compensation committees be independent and that companies disclose CEO pay relative to other employees and pay-for-performance measures.46
On proxy access, Dodd-Frank affirmed the SEC’s authority to issue a rule granting shareholders access to the ballot, but declined to dictate whether or not the Commission ought to do so. Proxy access had returned to the SEC’s agenda in June 2009 with the proposal of new rules. In August 2010, the Commission adopted Rule 14a-11 requiring a company to list the nominees put forth by shareholders who had held more than 3% of its stocks continuously for at least three years.
Rule 14a-11 was struck down a year later by the D.C. Circuit Court, which held that the SEC had not given the rule proper economic analysis. The Business Roundtable v. SEC decision, however, left a private ordering option in place, allowing shareholders themselves to propose and vote on changes to corporate by-laws reforming proxy access.47 As John Olson noted, “Ironically, what we ended up with was what the business community and the American Bar Association were advocating.”48
Further SEC rules required companies to expand the biographies of directors and to lay out their qualifications for the post. Because many attributed the financial crisis to corporations overexposed in their investments, boards were required to adopt risk management provisions and to disclose what considerations were made as to whether compensation incentives might lead to excessive risk taking. Finally, the SEC required companies to disclose CEO succession plans in order to alleviate risks associated with a loss of leadership. In the wake of the financial crisis, the SEC moved to increase the amount of information provided to investors and to address the risk-based issues highlighted by the collapse.49
The changes in corporate governance coming out of the Great Recession continued both the federalization of governance and the expansion of shareholder influence. In 2002, the focus was on the audit committee; in 2010, it was on the compensation committee. Although the Dodd-Frank Act did not ensure direct access to the ballot, it encouraged shareholders and managers to hammer out mutually-satisfactory solutions, enabling firms to adapt to the new world of corporate governance.50
(46) June 27, 2013 Interview with Meredith Cross. See Sections 951 to 956 of Dodd-Frank Wall Street Reform and Consumer Protection Act.
Meredith Cross served two stints at the SEC during times of remarkable change. During her tenure from 1990 – 1998, Ms. Cross dealt with one of the most significant challenges during that period -- bringing the agency into the internet age. The internet presented great new opportunities for businesses to share information with investors, but at the same time provided a vast new frontier for fraudsters, and the securities laws were not written with the internet in mind. With an intervening stint at WilmerHale from 1998 to 2009, Ms. Cross returned to the agency from 2009 - 2013 as Director of the Division of Corporation Finance after the financial crisis, and led the division through the challenges that came with the Madoff scandal and Dodd-Frank and JOBS Acts.
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