The SEC and Corporate Governance: The Limits of Disclosure (Exchange Act Release No. 61175) (An Introduction)

We have noted before that the SEC has in recent years become more enmeshed in the corporate governance process. SOX largely gave the SEC control over audit committees.  Access involves rule changes that would facilitate the election of directors nominated by shareholders.  The proposed settlement with BofA contained significant corporate governance changes, including a requirement for super-independent directors on the compensation committee.

The movement can be explained by weaknesses in the state law approach to governance and the incremental shift of governance authority to the Securities and Exchange Commission.  Despite some increase in regulatory authority, the SEC has largely had its hands tied in the area, with its authority mostly limited to disclosure.  As we have discussed, the SEC has tried to use disclosure to alter the substantive behavior of officers and directors with at best mixed success.  See Essay: Corporate Governance, the Securities and Exchange Commission, and the Limits of Disclosure. 

The latest salvo in the area was the adoption of new disclosure rules in Exchange Act Release No. 61175 (Dec. 16, 2009).  The effort is a fairly blatant attempt to influence to governance process.  It touches on hot button issues such as the tabulation of shareholder votes, the separation of chairman/CEO, and the diversity of the board.  The new requirements likewise seek to force companies to use independent compensation consultants.  They also insert the Commission more deeply into the compensation process, requiring disclosure of compensation practices for those below the top five highest paid officers. 

We will explore some of these new requirements in the next several posts.