Page 591 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 10. The Board of Directors 577

submit proposals outside of this SEC rule but would have to incur the cost of preparing a
proxy statement and soliciting votes.
The shareholders vote on such matters as election of the directors, approval of inde-
pendent auditors, authorization of the number of shares of stock the company may issue, and
other management issues or shareholder resolutions.
With the increasing financial resources of pension plans, institutional shareholders have
been gaining an increasing portion of the stock market. Institutional shareholders with large
blocks of stock have become a powerful voice in determining what companies should and
should not do. They are also very influential in determining who will serve as directors. Once
content to simply disagree by selling their stock, many shareholders today push the issue of
corporate governance to the forefront of the board agenda and the shareholder meeting. As
of 2004, mutual funds have had to indicate how they voted on proxy proposals.

Corporate Governance

At the turn of the century, corporate governance evolved with the passage from privately held
companies to publicly held companies. The shift grew out of the need for private companies
to “go public” in order to raise needed capital through the issuance of company stock. Funds
from the sale of stock were a debt-free solution to capital needs.
A number of organizations have identified what they believe to be appropriate corporate
governance principles. Among the most notable of these organizations are the Business
Roundtable, the California Public Employees’ Retirement System (CalPERS), Institutional
Shareholder Services, the National Association of Corporate Directors (NACD), and
Teachers Insurance Annuity Association-College Retirement Equities Fund (TIAA-CREF).
Several have adopted formulas to measure the effectiveness of the company’s corporate
governance.
Former SEC Chairman Richard Breeden investigated corporate practices at WorldCom
and issued a report unanimously approved by the company’s new board. Although the report
deals with a company coming out of bankruptcy, several recommendations are worth con-
sideration by other companies as well: separation of the board chair and the CEO positions;
a ten-year term limit for directors; shareholder approval required for any pay package
and severance payment above specified levels (e.g., $15 million for pay and $10 million
for severance); compensation consultants retained by the compensation committee (not
by management); and every member of the compensation committee independent and
experienced in pay issues.
Nothing has had a greater impact than the Sarbanes-Oxley Act of 2002, which was
passed following a number of business scandals involving fraud. The act included the follow-
ing requirements:

1. Adoption of or changes to a corporate code of ethics must be disclosed in a timely
manner.
2. CEOs and CFOs must certify in writing their quarterly and annual financial
statements.
3. Material changes in the condition of the company’s financial condition must be
disclosed in real time.
4. Publicly traded companies must have only independent directors on their audit
committee.