Corporate Governance

The SEC and Corporate Governance: The Schapiro Shift Is Underway

By J. Robert Brown

Mary Schapiro comes to the SEC aware that there is pent up demand for corporate governance reform.  Some, such as access, will likely need to be addressed through rulemaking.  Others can happen more quickly.  One place where changes can be seen quickly is with respect to no action letters under Rule 14a-8. 

An example of this occurring can be seen in connection with Regions Financial Corporation (Feb. 5, 2009). The proposal (submitted by the Sheet Metal Workers' National Pension Fund) "urge[d]" the board of Regions Financial, a financial institution accepting funds under TARP, to limit executive compensation and implement certain restrictions.  The text of the proposal is below.  The company sought no action letter (arguing, among other things, that the proposal was really multiple proposals and contained misleading statements).  The staff of the Commission, however, denied the relief.  As was noted by RiskMetrics:  "The decision also is significant given that 15 of 22 similar proposal filings tracked by RiskMetrics have been challenged at the SEC. Three have thus far been omitted." 

The decision by the staff likely reflects greater willingness to decline no action letter relief in connection with proposals that raise concerns about executive compensation.  See also The Ryland Group, Inc. (Feb. 5,2009)(refusing to issue no action relief to omit proposal calling for board to adopt policies with respect to golden parachutes).  Between the executive compensation provisions in the bailout bill and the increasing pressure for say on pay, the corner has turned on shareholder involvement in the compensation process.  There will be more proposals and, like the one in Regions Financial, they will go well beyond advisory votes and seek substantive limitations on the amount of pay.  From the ruling in this case, it looks like the staff doesn't intend to be an impediment to these proposals. 

Resolved: Given that Regions Financial Corporation (“Company”) is a participant in the Capital Purchase Program established under the Troubled Asset Relief Program (“TARP”) of the Economic Emergency Stabilization Act of 2008 (“Stabilization Act”) and has received an infusion of capital from the U.S. Treasury, Company shareholders urge the Board of Directors and its compensation committee to implement the following set of executive compensation reforms that impose important limitations on senior executive compensation:

•  A limit on senior executive target annual incentive compensation (bonus) to an amount no greater than one times the executive’s annual salary;

•  A requirement that a majority of long-term compensation be awarded in the form of performance-vested equity instruments, such as performance shares or performance-vested restricted shares.

• A freeze on new stock option awards to senior executives, unless the options are indexed to peer group performance so that relative, not absolute, future stock price improvements are rewarded;

• A strong equity retention requirement mandating that senior executives hold for the full term of their employment at least 75% of the shares of stock obtained through equity awards;

• A prohibition on accelerated vesting for all unvested equity awards held by senior executives.

•  A limit on all senior executive severance payments to an amount no greater than one times the executive’s annual salary; and

• A freeze on senior executives’ accrual of retirement benefits under any supplemental executive retirement plan (SERP) maintained by the Company for the benefit of senior executives.

Full post as published by The Race to the Bottom on February 20, 2009 (boomark / email).