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.

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.

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.

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. 

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.

(1) Discussion of the SEC Staff’s views of the Dodd-Frank provisions already implemented with Meredith Cross, Director of the Securities & Exchange Commission (“SEC”) Division of Corporate Finance;

(2) Roundtable discussing the four main governance provisions of Dodd-Frank, (1) Say on Pay; (2) Proxy Access; (3) Independent Compensation Committee Members and Consultants; and (4) Splitting the positions of Chief Executive Officer and Non-Executive Chairman;

Day Three looks to be a shorter day but have a significant Corporate Governance discussion regarding the separation of the CEO and Chairman.  

Notable discussions included:

 (1) SEC Chairman Mary Schapiro’s response to Congressman Darrell Issa regarding capital formation and IPOs;

 (2) Proxy mechanics, such as the regulation of proxy advisory firms and proxy fees;

 (3) Observations with compliance, during the current proxy season, regarding new Say-on-Pay disclosure requirements.  The Director stated generally that it was too early to tell, but that if shareholders were voting for compensation then the rules were functioning;

 (4) The SEC staff was pleased with disclosures made under the “Risk Rule,” regarding a “company’s compensation policies and practices as they related to the company’s risk management,” discussed here. 

The balance of our afternoon will focus on meetings regarding Proxy Access and related topics. We will post a summary at the conclusion of the afternoon meetings.

When addressing removing Directors, the panel noted the potential discoverability of Board evaluations and protecting the ability of a so-called ‘dissenting’ Board member from voicing a difficult but important opinion.  The discussion highlighted the value to the Board and shareholders of a ‘dissenting’ Board member's ability to play devil's advocate. This led to a general consensus that Board evaluations should remain as objectively based as possible. 

The discussion then moved to the impact of proxy access upon the Board.  The dialogue turned to a shareholder's ability to submit a suggestion to the Nominating Committee regarding Board members.  This option is much more communicative rather than combative, but for reasons unknown to the panel is rarely used.  It is seemingly contrary that the same entities insisting on proxy access are not availing themselves of already existing avenues to the same end. 

A more detailed discussion of the state of proxy access will follow this afternoon. 

(1) Board diversity disclosures under Item 407 of Regulation S-K, and whether the disclosure regime was producing the intended results;

(2) whether a shareholder access provision will empower shareholders and be an effective check on corporate directors, or be used to embolden institutional interests of strong-arming the Board for their own gain;

(3) whether State or Federal regulation is the most effective and proper means to oversee the relationship between corporate directors and officers and shareholders;

(4) generally speaking, is the Dodd-Frank reform truly a reformation or a politically motivated reaction to the financial crisis.

Many of these points were posed and discussed, although we will not know the true answers for some time to come. 

Day Two promises to be more intriguing conversations, panels, and posts; we look forward to hearing your comments.