Now that we have started the one-year countdown to the U.S. presidential election, it is time to get braced for what could be a sea change in corporate governance regulation if a Democrat gains the White House. Polls show that is a real possibility. Even more likely is a Democratic sweep of Congress. If both occur, the effects on corporate governance could be profound. A Democratic newcomer might change both policy and people at the top. We will offer some juicy, early speculation about just who to watch. But before that, let’s check where the partisan divide over current issues is deepest; where, unfortunately, the existing policy makers have deadlocked. That is where policy will switch first.
Start with proxy access—the right of shareowners to place nominees for the board of directors onto the corporate proxy. Some investors have long pushed for this ability, and the U.S. Securities and Exchange Commission has been considering it for years. The SEC now appears bent on adopting a rule this month, despite recent resignations of both Democratic commissioners. The new numbers mean that the only majority possible would seem to be for a rule blocking access. Worse, the resignations seem to have emboldened some hardliners. They have said, in effect, “I’ll see you and raise you the pot limit,” by suggesting the end to investors’ long-held authority to petition non-binding shareowner resolutions.
Such gamesmanship may win poker games, but it is rotten policy making. Either outcome would be certain to spark outrage from Democrats. Lest there be any doubt about that, House Financial Services Committee Chair Barney Frank last month promised the National Association of Corporate Directors that he would rally Congress to reverse any SEC decision taking this course.
Bottom line: Expect a 2009 Democratic administration to make access a top corporate governance priority. Not only that, but the more polarizing the SEC rule now, the more likely it is that reform advocates will find political support for access under more liberal conditions than terms now floated by the agency. Hardliners might well grow to regret fighting rather than embracing compromise now.
Broker votes are another place to look for policy change under a Democratic administration. The controversial measure authorizes brokers to vote client shares if, 10 days before an annual meeting, no ballot instructions are received from retail clients. The Council of Institutional Investors dubs broker voting “legalized ballot stuffing” since the practice normally pads pro-management totals. Of course, the SEC could act before the election on a year-old New York Stock Exchange proposal to abolish Rule 452 for director elections. But nothing has followed the usual pattern in this case. SEC ratification of exchange rule amendments is nearly always routine. Not this time. Regulators have stalled without public explanation. Some in the business community argue that 452 reform should come in a package of measures to aid corporate communication with investors. But shareowner critics label that an excuse for permanent procrastination. If the SEC does fail to act, expect a Democratic White House to do so instead.
Two other areas could see U-turns. One is “say on pay,” the British import that would give shareowners an annual advisory vote of confidence on a corporate board’s compensation policies. Frank’s committee led the House of Representatives to adopt—by a rare two-to-one bipartisan majority—legislation that would mandate the advisory vote at some 7,000 U.S.-listed companies. A counterpart Senate bill is pending. The Bush administration is unequivocally opposed. But expect a Democratic president and Congress to treat say on pay more favorably.
Finally, an incoming Democrat is likely to be interested in promoting corporate social responsibility, especially on energy and climate change issues. A coalition of institutional investors recently called on the SEC to require more disclosure from corporations in how they handle environmental risks. That might be a template for 2009 regulation.
If you doubt that an election could have that much sway on corporate governance, just look at Britain in 1997, when Tony Blair’s Labour party ended the long reign of Conservatives in Downing Street. He brought in say-on-pay, pressed for more independent directors on corporate boards, accelerated shareowner activism, and introduced a range of incentives to push corporate social responsibility. The lesson for America: politicians can find reforms in corporate governance as having real political traction.
Now for the fun part. In the last decade we’ve watched the rise of a cohort of governance activists. They have become, in effect, the shadow cabinet of corporate governance policymaking for a 2009 Democratic White House. The buzz has already started about who might get what post. Names will doubtless enter or drop off lists over the next 15 months, before a new president starts hiring and nominating. And, of course, a Republican might wind up winning next November, making much of this particular roster moot. But in the meantime, let’s get you in the loop.
Harvey Goldschmid is whispered as a potential next chairman of the SEC. The former commissioner, now at Weil, Gotshal & Manges, is known as a strong champion of shareowner rights, including access. Other names being bandied about for Democratic slots on the SEC include attorney Luis Aquilar of Atlanta’s McKenna Long & Aldridge; John Wilcox, now governance chief at TIAA-CREF; Kurt Schacht, executive director of the CFA Centre for Financial Market Integrity; Damon Silvers, associate general counsel at the AFL-CIO; and none other than our own Jon Lukomnik, CW columnist, Sinclair Capital chief, and former deputy comptroller of the City of New York. (Note: Though this has always been a joint column, the previous paragraph and list of potential appointees is solely the work of Davis. Lukomnik has no comment on either the list or on the inclusion of his name in it.)
While the vacancies at the SEC have accelerated public speculation about who might fill those slots, there are a host of other policymaking slots that the next president will have to fill. If a Democrat wins, might Nell Minow be named pension czar at the Department of Labor? Minow is chief editor at The Corporate Library and a longtime advocate of shareowner rights. Her frequent co-author, Robert A.G. Monks, when serving in that job under the Reagan administration, introduced key reforms spurring investor activism. Another member of the de facto shadow cabinet who could end up with an influential DOL post overseeing funds is Richard Ferlauto, now director of pension and benefit investment policy at the AFSCME trade union. And at the Public Company Accounting Oversight Board, the agency overseeing the audit profession, think Lynn Turner, ex-SEC chief accountant and former executive of Glass, Lewis & Co. or think perhaps of heads of governance consulting units at the large accounting firms.
Any of these appointments could signal greater federal attention to shareowner rights, robust oversight by corporate boards, and investor activism. For now, companies can best prepare by urging moderation in the waning months of the lame-duck administration and by keeping lines of communication open to members of that shadow cabinet.