In the proposed rules on “Proxy Disclosure and Solicitation Enhancements” (find them here: http://www.sec.gov/rules/proposed/2009/33-9052fr.pdf) published in the Federal Register, on Friday, July 17th, the SEC is proposing that companies report details regarding the company’s current leadership structure in their proxy and information statements. Specifically, the new disclosure rules would require companies to address the following issues:
If adopted, the new rules would be effective for the 2010 proxy season. According to the SEC, the intention of the rule is to “provide investors with insights about why the company has chosen that particular leadership structure.” Hopefully, under these new rules, companies would discuss any leadership structure they have, and not limit the discussion to whether they have separated the role of CEO and Chair. It would be most helpful for shareholders to see an explanation of whatever leadership structure the company has in place. At The Corporate Library, we have identified numerous leadership structures among the more than 3,200 North American companies we cover, beyond the more common structures mentioned in the SEC’s proposed rules. For example, I have been conducting a study of over 100 US companies that have an Executive Chair of the Board (i.e., a board chair who is not CEO but who is an employee of – and paid a salary by – the company). Ideally, companies with this structure would explain to shareholders the roles and responsibilities that person is providing the company and why they are paying large salaries – sometimes as much or more than the CEO – to an Executive Chair. Similarly, explanations for situations where there are other unusual leadership structures, such as Vice Chairs, Co-Chairs, an “Office of the President,” etc. would be helpful. A positive change that we would see if these rules are adopted is more meaningful information about the roles and responsibilities of the lead independent director. However, companies should also have to disclose their reasoning if they have combined the roles of CEO and Chair of the Board and NOT created the position of lead independent director (or a similar position). Surprisingly, there are many US companies which fall into this category. If companies comply with the spirit of the new disclosure rules, shareholders should be given insight into the process by which the board decides upon the best leadership structure. Ideally, when making this decision, the board will take into consideration issues such as the following: the person currently filling both roles; the presence of a lead independent director and the person currently in that role; the current composition and effectiveness of the entire board and other governance structures currently in place; the compensation practices currently being used to motivate corporate leaders; the company-wide leadership succession plan; the competitive and economic situations facing the company, etc. We can hope that all boards already have such a process in place, and discuss the issue as a standing agenda item on their annual board calendar. However, it is not only important to determine the best structure for the company and the board “at the time of filing,” as the SEC requests. Boards should also acknowledge that this structure may not always be appropriate. The board’s decision would not be complete until they also discussed and decided upon the changes that would lead to the need to reassess the leadership structure. Along those lines, the SEC should consider requiring companies to disclose whether or not there is a succession plan in place for board and company leadership. I understand that companies will not disclose the details of succession plans, but telling shareholders that one is in place and describing the role the board plays in creating, reviewing and updating the plan should be given consideration. In the rule proposal, the SEC is careful to point out that they are not taking a stand on which leadership structure is preferred, stating that “… we note that different leadership structures may be suitable for different companies depending on factors such as the size of a company, the nature of a company’s business, or internal control considerations, among other things.” However, we do hope that, if approved, the requirements for more disclosure will ensure that all boards are having meaningful discussions and debates about the appropriate leadership structure for their companies, both currently and in the future.
Annalisa Barrett — Senior Research Associate
