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July 06, 2009

SEC Proposes Rule Changes to Improve Corporate Transparency
    by Robert Kropp

Proposals address shareowner votes on executive compensation at TARP recipients and disclosure of information on corporate governance, and eliminate broker voting on uninstructed shares. -- Declaring that "With over 800 billion shares being voted annually at over 7,000 company meetings, it is imperative that our proxy voting process work—starting with the quality of disclosure and continuing through to the integrity of the vote results," Securities and Exchange Commission (SEC) Chairman Mary Schapiro introduced three proposals on July 1 that signal the Commission's resolve under her leadership to return to its mandate of protecting investors.

The first proposal requires public companies that are recipients of financial assistance under the Troubled Asset Relief Program (TARP) to provide separate shareowner votes on executive compensation. The proposal is designed to help implement the requirement under the Emergency Economic Stabilization Act of 2008 that TARP recipients permit an advisory vote by shareowners on executive compensation.

The proposed rule change requires that TARP recipients "disclose in the proxy statement that they are providing a separate shareholder vote on executive compensation and to briefly explain the general effect of the vote, such as whether the vote is non-binding."

The second proposal is designed to improve disclosure to shareowners on matters of compensation and corporate governance. It would require that proxy and information statements issued by public companies include information about the relationship of their compensation policies to risk, the qualifications of directors, executive officers and nominees, corporate leadership structure, and potential conflicts of interests of compensation consultants.

The second proposal is also intended "to improve the reporting of annual stock and option awards to company executives and directors as well as to require quicker reporting of election results."

Finally, the Commission also voted to approve a proposal from the New York Stock Exchange (NYSE) to eliminate broker discretionary voting for elections of corporate directors. In 2006, the NYSE found that broker voting often follows the recommendations of incumbent boards, and can provide a quorum in which broker votes of uninstructed shares can be used to establish a quorum at shareowner meetings.

As an example, the NYSE cited a shareowner vote at the Walt Disney Company's 2004 Annual Meeting, in which CEO Michael Eisner was re-elected to the board with 55% of the votes cast. According to the NYSE, "Had broker votes not counted in this election then Mr. Eisner would have received only 45% of the votes in favor of re-election, and a majority of the votes cast, 54%, would have been withheld from him."

Public comment on the SEC proposals will be permitted for 60 days after their publication in the Federal Register.

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