At a legislative hearing this week, investor advocates criticized the Securities and Exchange Commission's proposed proxy access rules, while business representatives expressed wariness about giving shareholders the right to nominate directors to appear on corporate proxy statements.

Rep. Barney Frank, the Democratic chairman of the House Committee on Financial Services, invited five investor and business representatives to a Sept. 27 hearing to testify about two competing rule proposals issued by the SEC in July. The so-called "long" rule would impose a 5 percent ownership threshold and additional disclosure requirements on shareholders who file access bylaw proposals. The "short" rule would reaffirm the SEC's earlier position that firms can omit those shareholder resolutions.

John Castellani, president of the Business Roundtable, warned that proxy access "would result in special interest nominees and politicize the director election process."

"Proxy access is a bad idea whose time has passed," he told lawmakers at the hearing in Washington.

Donald Kirshbaum, investment policy officer for Connecticut's state pension funds, emphasized that proxy access would provide investors an alternative to "onerous and costly" proxy fights. He recalled that proxy access received wide support from investors this year when it appeared on the ballot at three companies.

Investor advocates said the status quo--under which shareholders face no additional barriers to filing access proposals--is preferable to either of the SEC's draft rules.

Ann Yerger, executive director of the Council of Institutional Investors (CII), told lawmakers that the SEC's proposed 5 percent ownership requirement would be too high for most institutional investors--even large ones like state pension funds. "Even the 10 largest pension funds combined would be unlikely to meet the threshold in any public company, large or small-cap," she said.

Paul Schott Stevens, president of the Investment Company Institute, an association of U.S. mutual fund companies, disagreed, and said the SEC should consider even a higher threshold. Stevens said a group of investors could easily band together to reach the 5 percent mark. For example, he said the State of Wisconsin Investment Board has 5-percent holdings in 28 different companies, although he acknowledged that most of them are smaller firms.

Castellani and several Republican lawmakers expressed concern that proxy access would lead to split votes and less-cohesive boards.

"The last thing shareholders need is fractured boards representing special interests or small groups of shareholders," Castellani said. The current system of board elections has produced high-volume returns for shareholders, he said.

"Fractious boards are the model in Europe; they have proven to be ineffective in generating returns," agreed Rep. Deborah Pryce, a Republican from Ohio.

A board's nominating committee already does the job of selecting directors who will serve the interests of all shareholders, not just a select few, Castellani argued.

In response to these concerns, investor advocates noted that shareholders would have to undertake a lengthy process before getting a representative on a board. A proxy access bylaw first would have to be approved by at least a majority of shareholders to go into effect, and the shareholder nominees in turn would have to win majority support in order to take a board seat. Yerger noted that most institutional investors are "sophisticated" and "would not elect someone who was just there to promote a special interest."

Rep. Emanuel Cleaver, a Missouri Democrat, and Rep. Frank challenged Castellani about his concerns about split votes and special interests. Frank said boardroom debate can be healthy and lead to better decisions. He repeatedly pressed Castellani to answer whether the "special interest" label would apply to investor proponents of divestment from companies with ties to Sudan or Iran.

Timothy Smith, senior vice president of Walden Asset Management and board chair of the Social Investment Forum, told lawmakers that it is dangerous to assume that investors advocating labor, social, or environmental interests would neglect their fiduciary duty to the rest of the company's shareholders.

"The business community too often falls into the mentality of 'we don't like what you're doing, therefore you're a special interest,'" Smith said.

Interested persons have until Oct. 2 to submit comments on the Securities and Exchange Commission's alternate rulemaking proposals on the question of whether shareholders should have the right to nominate any member of the board of directors. One of those proposals would give large shareholders the right to nominate a few directors; the other would foreclose access to all shareholders.

The question of proxy access has been kicking around for several years, shadowed by fierce opposition from the corporate community, and was the subject of a proposed 2003 rulemaking that died on the vine. While now revived, proxy access suddenly has been superseded by controversy over other issues broached in the notice of the rulemaking that would provide for limited proxy access. Among other things, those proposals ask for comment on allowing corporations to adopt bylaw amendments that could enable them to bypass the SEC-supervised shareholder resolution process for non-binding, or "precatory," proposals, which constitute most resolutions on social issues; substituting an electronic chat room for the proxy process; and raising the percentages a resolution must win to qualify for resubmission. If the SEC staff develops a formal proposal out of comments on those questions, it would lead to the first full-scale review of Rule 14a-8, its shareholder proposal rule, since a largely aborted rulemaking in 1997-98. Earlier reconsiderations of the rule occurred in 1976 and 1983.

To access the entire article, SEC Proxy Access Proposals Stir New Controversies, please visit "Additional Resources" in the Corporate Governance section of RiskMetrics Group's Knowledge Center.

The House Committee on Financial Services plans to hold a hearing on the SEC's proxy access proposals on Sept. 27. The committee hearing is scheduled to start at 10 a.m. (Washington time). Among the witnesses will be Ann Yerger of the Council of Institutional Investors, Tim Smith of Walden Asset Management, and John J. Castellani of the Business Roundtable.

For more details on the hearing, please visit here.

The Carbon Disclosure Project (CDP), a collaboration of over 315 institutional investors with assets under management of more then $41 trillion, released today its Fifth Annual Report on Global Climate Change. CDP has sent a questionnaire to the world's largest publicly-owned companies each year since 2002, which elicits detailed information on the risks and opportunities posed to the companies by climate change. The companies' responses to the questionnaire, and an analysis of the responses, will be published today in the CDP reports and on the CDP website. RiskMetrics Group is honored to have authored the U.S. S&P500 Report.

The S&P500 Report summarizes key trends identified in S&P500 companies' responses to the CDP5 survey and highlights commercial risks and opportunities that climate change is presenting to these widely held firms. Through increased support and improved quality of responses, CDP5 shows that the private sector in the US is increasingly engaged in addressing the global challenges presented by climate change. In fact, 81 percent of S&P500 respondents consider climate change as presenting commercial risks for their businesses, compared to only 60 percent that see it as presenting commercial opportunities.

To access the report, please visit the "In the Spotlight" section on RiskMetrics Group's Web Site. To hear Doug Cogan, RiskMetrics Group's Head of Climate Change Research, discuss the findings from the S&P500 Report, please visit "Leadership Interviews" on the ESG section of RiskMetrics Group's Knowledge Center.

A group of 22 state pension funds, environmental groups, and other investors are calling on the Securities and Exchange Commission to require public companies to report on their financial risk from global climate change.

The coalition--which includes Ceres, the California Public Employees' Retirement System, F&C Asset Management, and New York City Comptroller William C. Thompson--sent a petition on Sept. 18 to the SEC asking for more comprehensive disclosure of what it calls "climate risk" in public companies' earnings and operations statements. Accounting for climate risk would mean detailing new regulatory costs and procedures, reporting on physical damage to facilities because of changing weather, and citing any shifts in demand for products or services related to climate change.

"The days are long past when climate risk can be treated as a peripheral or hypothetical concern," the petition reads. "Companies' financial results increasingly depend on their ability to avoid climate risk and to capitalize on new business opportunities by responding to the changing physical and regulatory environment."

Specifically, the coalition, which manages more than $1.5 trillion in assets, would like to see detailed disclosure of physical risks material to financial condition, risks and opportunities associated with greenhouse gas regulation, and legal proceedings relating to climate change. The petition explicitly states that disclosure would be different for each company, depending on industry and operations.

While companies now are required to provide "material" information to investors, the coalition contends that corporate disclosures on climate change have been "scant and inconsistent." The petition urges the SEC's Corporation Finance Division to "begin closely scrutinizing the adequacy" of these disclosures.

The coalition pointed to ExxonMobil as an example of a company where more disclosure would be helpful for investors. The oil giant's 2006 annual report noted that its worldwide operations could be affected from time to time, by factors like "laws and regulations related to environmental or energy security matters, including those addressing alternative energy sources and the risks of global climate change …" ExxonMobil's filing mentioned the effects of severe weather, though it was not specifically tied to climate change.

Linking catastrophic events like hurricanes or wildfires to climate change can be difficult when trying to assess causation.

"I think the issue is partly [theoretical] and partly factual," said David Snyder, vice president and assistant general counsel for the American Insurance Association (AIA), an advocacy association for property and casualty insurers. "There are many scientists who believe that it's all linked; other scientists aren't so sure."

The AIA has not officially taken a position on the investor petition, but Snyder said that qualitative rather than quantitative disclosure on the material effects of weather events may be easier for companies to make accurately.

Environmental groups, including Ceres, have written to the SEC twice before--in 2004 and again in 2006--requesting more disclosure on climate change risks.

The SEC has not indicated what specific action it will take in response to the petition. "The SEC is committed to robust disclosure by companies of material environmental issues," commission spokesman John Nester told The Washington Post. "The key requirement for triggering disclosure is that the impact or potential impact will be material to a company and is therefore material to investors."

RiskMetrics Group is pleased to introduce today a new company structure and brand framework. Through the continued growth of our risk business and the acquisitions of ISS in January and CFRA in August, we've added a compelling set of new products and services for investors and asset owners around the world. To manage our growth, we have set up three primary business units–Risk Management, ISS Governance Services, Financial Research & Analysis–and an experimentation group, RiskMetrics Labs.Together, these units connect and build upon our long history of addressing market, credit, portfolio, governance, accounting, M&A, legal and environmental risks.

As part of our rebranding, we've combined our websites into one informational site at www.riskmetrics.com. Additionally, our ISS Corporate Governance Blog has expanded to reflect our combined entities and is now the RiskMetrics Group Risk and Governance Blog. Both sites should continue to serve as information sources on market trends, our company and our products and services.

After reviewing how companies have complied with new pay disclosure rules, the Securities and Exchange Commission is asking some firms to provide more information on their executive compensation practices.

According to news reports, the commission plans to send letters to about 300 companies; the SEC faxed the first set of letters in late August. Schering-Plough, Coca-Cola, Bristol-Myers Squibb, and Prudential Financial were among the companies receiving inquiries, The Wall Street Journal reported.

"If you were to look at the Fortune 100, you can probably assume that one-third of the companies--maybe more--got these letters," attorney Mark Borges, who works with Mercer Human Resource Consulting, told the Associated Press on Aug. 31.

The letters vary by company; some include requests for a detailed analysis of why CEO pay is "significantly higher" than that of other top executives, a list of firms the company uses to benchmark its executive pay, or the specific performance targets for executive bonuses, according to news reports.

"The narrative explaining the reasons behind [pay] packages could stand some improvement," SEC spokesman John Nester told the Associated Press.

Because this is the first year that companies have complied with the SEC's sweeping new pay disclosure rules, the agency said that it would follow up with additional questions, if necessary. Nester told the Journal that the compensation disclosures by many companies were vague and inflated with "legalese."

Some SEC observers say that the information the commission is asking for will only add to the considerable bulk of some companies' compensation disclosures. "These new requirements may make pay disclosure even wordier and more complex," Ronald Mueller, a partner with the law firm Gibson, Dunn & Crutcher told The Wall Street Journal.

However, SEC Chairman Christopher Cox has argued on several occasions that the size of the compensation sections in proxy statements would decrease if companies used "plain English" to tell investors how they decide on executive pay packages. A narrative full of legal jargon only makes the section longer, not clearer, Cox said in a speech in late March.

The agency is giving most companies a Sept. 21 deadline to provide the additional information, according to the Journal, and the SEC plans to send out another batch of letters soon. Company-agency correspondence is usually made public via the SEC's Web site 45 days after an issue is considered closed. The agency plans to issue a report on pay disclosure later this year.