Spring Meeting: Corporate Governance Round Table - Parts Three & Four: Independent Compensation Consultants & Directors and Splitting the Roles of Chairman & CEO

The panel consolidated their last two discussions as the time drew to a close. First, was a brief conversation regarding Independent Compensation Consultants and Independent Directors. Although this topic does not have the same momentum as other Dodd-Frank provisions, there were still a number of opinions in the room. The conversation centered on the inability to adequately define “independent” across different standards such as NYSE Rules, NASD Rules, and now under Dodd-Frank.  Many commentators stated that expectations of who remains independent under all the rules are on their way to an absurd and impractical extreme. This discussion concluded with the understanding that it is extremely difficult to get a corporation to voluntarily initiate this type of change.

The panel concluded with a discussion of splitting the Chairman and CEO positions. This conversation was quite common throughout the Conference. The discussion began with this question: What creates an effective CEO/Chairman relationship? The group came to a consensus that corporations must avoid dueling executives and roles must be clearly defined and implemented This led top a conclusion in favor of the splitting the roles based on the idea that the title should mean something.

One panelist broke this argument down as follows. Since the CEO works for the Board of Directors, and the Chairman is the head of the Board, how can the CEO logically run the group for whom he or she works? This leads to an inherent conflict, as the individual being monitored is in charge of the group doing the monitoring.  Although seemingly difficult to argue with, this point was met with conflicting commentary. The concerns mainly focus on the confusion within the company, and within management brought by splitting the roles.

Although the two sides on this issue share some common ground, both seem to have a firm grasp of their own positions which will make this issue an interesting one to follow going in the future.

Thank you again to everyone who followed our coverage of the 2011 ABA Business Law Section’s Spring Meeting from Boston, MA.

Spring Meeting: Corporate Governance Round Table - Part Two: Proxy Access

After beginning the discussion with Say-on-Pay, the panel turned its attention to Proxy Access. After a brief summary of the 3 percent for 3 years (“3-3 Rule”), and an overview of the D.C. Circuit argument, the panel posed three primary issues. First, will Proxy Access continue to exist as proposed?  Next, is there a better alternative to the 3-3 Rule such as proxy reimbursement for successful or even nearly successful campaigns. The final alternative is keeping shareholders completely removed from the process.

Proponents of proxy access stated that it would only be used in extreme circumstances. Further, panelists discussed the importance of allowing investors to have influence within the Board and a forum for their ideas. However, other panelists did not see this as the correct vehicle for investors to have that voice. The panel continued by stating that many state laws previously allowed for 10% shareholders to call a special meeting, but that the 3-3 Rule creates problems due to its lack of definition of a sufficient interest.

The panel concluded the discussion on this issue in agreement that the main issue here is who pays. This led to further discussion of a Proxy Reimbursement plan. Also, it led to some speculation regarding the SEC’s next step if the Circuit decision goes against them.

Spring Meeting: Corporate Governance Round Table – Part One: Say-on-Pay

The following three posts will summarize Friday’s Corporate Governance Roundtable. Before beginning the series, Todd and I would like to personally thank everyone from the ABA Business Law Section and the University of Denver Sturm College of Law, especially the SBA, Professor Jay Brown, and Armin Sarabi, who made this trip possible.

The topic of Say-on-Pay led the discussion as it is being voted on by nearly every major corporation this year.  The panel began by discussing the positives brought on by Say-on-Pay. The first of which is requiring clear and well-described pay packages to receive a positive vote.  A member of the panel also voiced the position that Say-on-Pay allows for a much better outlet for pay concerns than what previously existed.  However, all did not share these views.  One overwhelming concern was that a compensation discussion between shareholders and the board should be a dialogue, not a mandated vote.  One panelist clearly articulated that because Say-on-Pay is statutory it is resented.  In the past, corporations have been willing to adopt different “best practices,” albeit on their own schedule, such as majority voting, but not because they were mandated.  He believes Say-on-Pay was not given the same opportunity.

The conversation on Say-on-Pay continued with the question of whether it is really even a big deal? Is this authority really any different from the power of a withhold vote? This led to reference to pending Australian legislation where, if more than a 25% withhold vote exists on Say on Pay for two consecutive years, it triggers a Spill Vote (to remove the entire Board) within 90 days. I am sure our readers can imagine the varying reactions this mention received. 

Finally, the discussion concluded with a very poignant point. In an opinion against Say-on-Pay, one panelist mentioned that the entire corporate system is based on the primary foundation of shareholder elections and management managing. Shareholders have the power to either re-elect or replace those Directors they feel are not adequately representing them. However, in his view Say-on-Pay is not an avenue to tell the Board that they are not representing the shareholder’s best interest but is a question of their judgment in managing.  Further, this panelist believed that if the system allows this type of micromanaging, it could be anyone’s guess what shareholders next Say will be on.

Spring Meeting: Current Events and Emerging Issues in Corporate Governance

Our next event was a panel discussing recent key court decisions and issues that affect the balance of power between boards and shareholders.  The panel was comprised of Scott Winter, Innisfree M&A Incorporated; David Webber, Associate Professor of Law, Boston University; Blake Rohrbacher, Richards, Layton & Finger, P.A.; and Steven Haas, Hunton & Williams.  

First, the following question was posed: Whether the 3-year 3% proxy access rule (“3-3 Rule”) will open the floodgates to a vast increase in the number of proxy fights?  The discussion indicated that the answer is unknown.  One commentator took the position that the advantages of running a proxy contest on your own, such as controlling the solicitations and seeing the results, rather than through the company, outweighed the costs; thus not increasing the number of contests.  In contrast another commentator indicated that large institutional investors would avail themselves of the new rule and begin affecting Board membership.  Additionally, even though the 3-3 Rule has been stayed pending challenge, Delaware Section 112 allows companies to amend its bylaws to grant proxy access to shareholders. 

 

Secondly, the panel discussed the recent Airgas decision, upholding the use of a poison pill, discussed here.  A compelling question was raised as a hypothetical: 

• Based on the facts presented in Airgas and after the Board valued the company at $78 a share, would it have been a breach of their fiduciary duty to drop the poison pill to allow shareholders to accept the $70 a share bid?

The breach of fiduciary duty argument was that the Board intentionally and knowingly dropped the poison pill, which is to the detriment of shareholders. This would rebut the Business Judgment Presumption and fail the Entire Fairness test because by allowing shareholders to accept an unfair price that the Board, and independent bankers, had determined was an unfair price.

The argument in defense suggested that you could not hold the Board liable for breach of fiduciary duty for removing the poison pill and allowing shareholders to decide what is best for them.  However, no consensus was reached and we invite our followers to comment and let us know what you think of the hypothetical. 

Spring Meeting: Board Leadership – Separating the Chairman and CEO

This morning’s panel discussed the intricacies of Board Leadership, especially as it relates to the separation of the Chairman and CEO positions. The panel consisted of John Stout, Fredrikson & Byron, P.A.; George Anderson, Tapestry Networks; Margaret Foran, Prudential Financial Services; Robert Halligan, Korn/Ferry International; and Elise Walton, Organizational and Governance Consulting.

The panel began the discussion with a rhetorical question of whether proof exists to support the theory that separation of the Chairman and CEO positions truly advances the underlying institution.  The general consensus throughout the meeting was that broad, sweeping generalizations are commonly misplaced as each corporation operates independently and should be free to determine how to structure their leadership and how to define specific roles.  The second key point focused on the definition of roles. Whether discussing the Chairman, Lead Director, or CEO, without clearly defined roles and allocation of authority, confusion and inefficiency is likely.  This lack of clarity could potentially lead to a Chairman and CEO overlapping and  vying for each other’s jobs. 

This discussion noted a number of points of caution associated with separating the two roles, but also made clear that with thought out and defined roles, such a transition may be beneficial for some companies.