O Corporate Governance Reform, Where Art Thou?

On January 7, 2009, Pomerantz partner Jason S. Cowart was a featured speaker at the Public Funds Summit held in Phoenix, Arizona. Below is a brief summary of his remarks, entitled "Where are the Corporate Governance Reforms?  An up-to-the-minute overview of initiatives designed to increase shareholder power."

The current financial crisis has led many to call for increased governmental regulation, and has also forced policymakers to address ways in which certain market participants - namely institutional investors - can more effectively protect their own interests.

Three shareholder empowerment initiatives are particularly important. The first is the SEC's proposed rule concerning shareholder proxy access. The rule would require companies to include in their proxy materials the names of director nominees submitted by shareholders who owned stock for at least one year and who satisfied certain requirements related to the size of their investment. Although many had hoped that this rule would become final before the end of 2009, the SEC recently announced that it was reopening the comment period until mid-January 2010. A shareholder's power to nominate directors is as fundamental a right as the ability of U.S. citizens to vote. In light of this fact, readers of the Monitor are strongly encouraged to express their support of the proposed rule by submitting comments to the SEC.

An equally important initiative concerns the ability of shareholders to have a voice on executive compensation. On December 11, 2009, the House of Representatives passed legislation that would: (a) require all companies to provide shareholders with an advisory vote on pay practices including executive compensation and golden parachutes; (b) enable regulators to ban inappropriate or imprudently risky compensation practices; and (c) increase disclosure requirements related to executive compensation. Similar legislation is pending in the Senate.  It seems highly likely that, by the end of 2010, some of these important provisions will become law.

Even if the law is not changed, however, shareholders can address concerns related to executive compensation through the courts. Shareholders have the ability to bring derivative lawsuits, and gain access to corporate books and records, for example, when they believe that corporate executives are being too richly rewarded. In this regard, the Pomerantz Firm recently commenced a lawsuit on behalf of the Louisiana Municipal Police Employees' Retirement System to recoup an extraordinary $75 million bonus awarded to the CEO of Chesepeake Energy, where that bonus coincided with the company's earnings plummeting by 50% and its stock price declining by 60%.

A third area of reform is a proposal to restore aiding and abetting liability in private actions brought under the Securities and Exchange Act of 1934. The two narrow SupremeCourt decisions that abolished such liability in recent years flew in the face of over sixty years of settled federal jurisprudence, and were especially anomalous given that Congress has recently emphasized the central role that gatekeepers (such as in-house counsel and auditors) play in detecting and preventing such misconduct. Moreover, the ban on aiding and abetting liability has disastrous consequences for investors. In the Enron and Parmalat cases, for example, the ban prohibited shareholders from holding various banks liable despite the fact that those banks played central roles in the frauds at issue. Similarly, in the current Refco litigation, shareholders are prevented from holding Refco's outside counsel liable despite the fact that he pled guilty to various criminal charges stemming from his role in the fraud. Although a draft Senate bill includes language that would undo these Supreme Court decisions, the bill that passed the House of Representatives did not. Readers of the Monitor are strongly encouraged to contact their federal representatives on this important issue as well.