I’ve never been one to let the paint dry on something before playing with it and today is no exception. The object of my attention today is the Financial Reform bill passed by the Senate yesterday. What has me picking at the corners of this freshly painted piece of legislation are three provisions addressing corporate governance reform: Proxy Access, majority voting standards for uncontested director elections and Say-on-Pay.
What I am most interested in here are two things.
First, what impact will each of these provisions have on improving corporate governance practices? Second, a related question is whether these provisions will have the desired effects their supporters hold dear?
Since the Senate and House bills must still be reconciled, there is some possibility that some of these provisions will be weakened. Corporate lobbyists will likely continue to push on watering down proxy access, perhaps the most troubling provision in the governance reform package. But that said, let me make a couple of predictions.
First, proxy access, while an important tool for investors, will have a limited impact on public companies. I suspect that large cap companies have little to worry about here given that getting holders of say 10% of the companies outstanding shares will have considerable trouble coming together to support their own candidates for board seats. Smaller cap companies may face more pressure from this provision as concerned shareholders have a potent tool for effecting change on boards. The wild card here is activist investors bent on taking over companies for their own purposes, perhaps to the exclusion of other shareholders. Having watched similar processes play out between shareholders and companies, the process matters as much as the outcome. Thus, winning an election may matter less than getting an opposing slate of directors on the proxy ballot. My guess is that proxy access will create a new cottage industry of activist investors utilizing this toll as an effective weapon in their takeover toolboxes.
Second, majority voting in uncontested director elections will likely be the most beneficial provision of the three reforms. I suspect that this provision may make electing directors more of a sport, akin to electing the local dog catcher or sewer commissioner. I suspect that in some limited instances, we will see that directors will actually have faces and statements of qualifications and will begin to actually talk to shareholders. While I think that shareholders will not become quite as agitated as a gaggle of Tea Party activists, even if a director is running against, well, nobody.
Finally, Say-on-Pay will likely result in little if any change in executive pay practices. Early indicators suggest that shareholders either don’t care about executive pay practices or they don’t really understand the concepts underlying pay setting processes as evidenced by votes on executive pay at TARP financed companies. Either way, the old adage, “you can lead a horse to water but you can’t make him drink” seems apt here. However, in the longer term, I suspect that there is a chance that investors will figure out how to sort out the noise from the substance in executive pay practices and vote numbers will start to reflect the underlying tensions between shareholders and executives. I suspect that the most likely scenario here is that pay levels will start to level out somewhat in the next few years regardless of vote outcomes.
I’ll check back in a year on this one.