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Schapiro: SEC's Role in Corporate Governance

In a recent address before the NACD Annual Corporate Governance Conference, SEC Chairman, Mary L. Schapiro set out her thoughts on the role of the SEC in regulating corporate governance.  Schpiro prefaced her remarks by recognizing that the role of directors has become increasingly complicated, and "the expectations for how corporate governance can fortify our economic system — through vigilance, risk management and transparency — have never been higher." No doubt prompted by recent criticism, and even court challenge, to SEC regulations reaching into the corporate governance area, Schapiro outlined what she sees as the contours of the SEC's responsibilities in the area. 

First, our responsibility is to ensure that our own rules support and do not interfere with governance characteristics that market participants — or, in some cases, Congress — have identified as significant.

When consensus has been reached that certain features are relevant to effective governance, then our rules regulating disclosure and the proxy process should ensure that this information is provided. How that information is interpreted and acted upon is up to board members and to the shareholders who elect them.

Second, when it comes to the securities markets, we are the guardians of honest disclosure. Companies and boards must tell their shareholders, current and prospective, the truth — and the whole truth — about those matters which are important to investment decision-making, including governance.

With this role in mind, Schapiro then described some of the areas of corporate governance focus on the SEC's agenda.  (Though she covered more than the issues outlined below, the following are the most relevant to fund directors.)

Engagement With Shareholders

The rulemakings required by Dodd-Frank will significantly increase disclosure requirements. And, looking further ahead, we are still receiving comments on our proxy plumbing concept release, a key component of which is a review of the current limitations on company-shareholder communications.

Schapiro referred to the Commission's proxy concept release requesting comments from the industry about how to improve proxy access, disclosure, and process overall.  Schapiro urged directors to comment on this release as well. 

Disclosures About Directors and Nominees

Last year, the Commission issued rules requiring the disclosure of director qualifications.  She heralded the resulting disclosures as generally successful.

We adopted new regulations that, for the first time, required describing what in the director’s background and skill-set led the board to select that individual. In the past, all that was presented in proxies about director candidates was a very brief biography that did little to communicate important information regarding the unique or significant value candidates might add to a particular company’s board.

In just their first year, these rules resulted — with some exceptions — in proxy statements that were more informative. They gave investors greater insight into the qualifications of board candidates, and a better understanding of how candidates’ skills and experience suited the needs of their companies.

Those same rules also require boards to disclose the leadership structure they've chosen, and provide some description of why.  The Dodd-Frank legislation goes beyond the current regulations, and requires a discussion of a host of potential conflicts of interest, and their resolution.  Schapiro warned that more regulations implementing the Dodd-Frank provisions would put these requirements into effect in upcoming months. 

Disclosures About Risk Oversight

Chairman Schapiro briefly discussed the requirements imposed last year on boards to disclose how they address risk. She reinforced that the Commission is looking for meaningful disclosure in this regard, and not boilerplate or general statements.

In light of heightened concerns about how boards address risk, we also added a new requirement, that boards explain how they oversee risk at the company. Some companies simply recited lines like “risk is overseen by the board as a whole.”

Not all that helpful, I would say. Meanwhile, other companies provided detailed disclosures of their boards’ and executives’ risk-related responsibilities and functions. I believe investors feel better informed and reassured by these more detailed disclosures.

The Commission has expressed its expectations about risk disclosure in other contexts, but has remained clear that it expects these disclosure requirements to be addressed meaningfully and clearly. 

Director Input on Rulemaking

Schapiro invited directors to engage the SEC during the rulemaking process, encouraging them to take advantage of the channels of comment and communication between directors and the SEC.

We have established a series of e-mail boxes on the SEC website to which comments can be addressed even before rules are proposed and formal comment periods begin.

In addition, SEC staff have been instructed to make every effort possible to accept requests for face-to-face meetings and, where appropriate, to seek out meetings with those affected by our proposals. Just as the written comments we receive will be posted on line, we will post memoranda detailing meeting participants, an agenda provided by persons meeting with staff, and any materials distributed at the meeting.

One group that is directly affected by these rulemakings, but which we have not heard from directly, is you, the directors who will be charged with complying with many of these regulations.

The Forum's staff is in contact with its membership on a daily basis regarding these and other emerging issues, working with them to formulate appropriate comments, input, and responses supporting what Forum members see as the proper role of directors with respect to relevant rule proposals. 

The full text of Chairman Schapiro's remarks is available at: