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Practising Law Institute Holds Conference on Corporate Governance

James Doty, a partner with Baker Botts L.L.P., chaired the Practising Law Institute's 2007 program on corporate governance. The first panel discussed majority voting initiatives, hedge fund activism and executive compensation. Doty inquired about the fate of the SEC's proposed rule 14a-11 which would have required companies, under certain circumstances, to include in their proxy materials shareholder nominees for election as directors. James Daly, an associate director in the SEC's Division of Corporation Finance, said it is not clear whether the SEC will bring the 2003 proposal back to life in light of other developments since rule 14a-11 was first considered. Daly later clarified that the proposal had been pulled from active consideration.

Paul Kingsley, with Davis Polk & Wardwell, discussed the rise in hedge fund activism. There are over 8,000 hedge funds worldwide, 100 of which are considered activist hedge funds, he said, based on the filing of a Schedule 13D to report their intent. These hedge funds have $50 billion devoted to activism.

Hedge fund activism differs from other forms of activism, mostly characterized by their "relentless" short-term outlook. Unlike institutional investors, hedge funds are not burdened by diversification requirements and may acquire large holdings of a particular issuer. Hedge funds are more focused on transactional goals such as special dividends or stock buy-backs, while institutional investors focus more on corporate governance issues such as the declassification of boards, majority voting and independent directors.

Kingsley added that the tenor of a hedge fund can change once it gains representation on a board of directors. The hedge fund's representative must act in all shareholders' interest. The fiduciary duties of a board member place restraints on the member's actions and insider knowledge puts restraints on trading.

During the panelists' discussion of the new executive compensation rules, Ernest Torain, Jr. with Vedder Price predicted that the first season's Compensation Disclosure & Analysis will be viewed as too long and not that useful. Meredith Cross, with Wilmer Cutler Pickering & Dorr LLP, also believes that the amount of disclosure will explode. Companies are struggling with the disclosure requirement, she said.

David Becker, with Cleary Gottlieb Steen & Hamilton LLP, believes the requirement that the CD&A be written in plain English reflects the SEC's long-term effort to stamp out bad writing and to get issuers to communicate clearly, effectively and without obfuscation. Sadly, none of its previous efforts have worked, he said.

Torain said he expected more attention on the filing, rather than the furnishing of the CD&A. The filing of the CD&A sweeps it into the CEO/CFO certification, he said. Torain thought companies would be more skittish about that. In discussing the new disclosure for perquisites, Cross noted that companies have always been required to report the incremental cost to the company, but they ignored the requirement and used the tax rate instead.

Now that the SEC has stated the requirement very clearly, Torain noted a certain amount of "de-perking." For instance, a company may no longer pay an executive's club dues, but Torain said there is no discussion of why. Some companies are adding an offsetting increase in compensation for the perks that are eliminated.

Doty said that corporate governance issues have created tension in some board rooms and ended the collegiality that once existed. The SEC intended to end the coziness that existed, and Doty believes that has been achieved. Becker said the Sarbanes-Oxley Act caused an ideological change. Everybody is engaging in adaptive behavior, he said. He believes the Act has had a profound impact on how corporations are governed. Kingsley agreed. He said the era of "don't rock the boat" is over.

Jacquelyn Lumb