The Stock Exchange of Hong Kong recently released its third annual survey of compliance with the Code on Corporate Governance. The results show some improvement in levels of compliance with Code provisions:

1. Compliance improved across most provisions - around 98 percent of issuers complied with at least 41 of the 45 code provisions (up from the 96 percent that complied with 41 out of 44 code provisions in the second review).

2. However, only 43 percent of issuers had established a nomination committee (2006: 40.9 percent).

3. Moreover, only 10.8 percent of issuers reported on a quarterly basis (2006: 15.6 percent).

The review looked at disclosures of corporate governance practices made by 1,213 publicly traded issuers (listed as of Dec. 31, 2007) in their 2007 annual reports. The universe is a slight increase over last year when the second review looked at disclosures made by 1,114 listed issuers in their 2006 annual reports.

In another significant development, the Securities and Exchange Commission has confirmed that hundreds of federally supported financial companies must hold their first "say on pay" votes this year. These advisory votes represent an extraordinary expansion of this reform and will likely set the stage for a market-wide rule.

The SEC issued an updated guidance today that backed the legislative interpretation offered by Senator Christopher Dodd in a Feb. 20 letter to the agency. As chairman of the Banking Committee, Dodd has oversight authority over the SEC and inserted the advisory vote provision into the recently enacted economic stimulus legislation.

While the stimulus bill did not set a precise date for the first compensation vote at the almost 400 firms that have participated in the federal Troubled Asset Relief Program (TARP), the law directed the SEC to prepare pay vote rules within a year, leading governance observers to initially conclude that the first votes would be in 2010. However, Dodd, in his letter, wrote that he believes that the legislation mandates advisory votes at any TARP firm that files both its preliminary and final proxy statements after Feb. 17, 2009–the date the law was signed.

The new SEC guidance and Dodd's letter has further encouraged the investor coalition that filed more than 100 "say on pay" resolutions this season. This campaign has made significant progress since 2006 when the first shareholder proposals appeared on U.S. ballots. Insurer Aflac held the management-sponsored advisory vote last May, and was followed by five other firms in 2008.

Tim Smith, a senior vice president at Walden Asset Management and a leading pay vote proponent, said the latest SEC guidance will prod other firms to agree to hold pay votes. He recalled that one major bank had expressed concern that holding a pay vote would leave it at a "competitive disadvantage," but said the new guidance "leaves us feeling much more comfortable with providing investors a chance to vote on compensation."

"We will watch the list of objections that would have appeared in company proxies melt away as companies by the hundreds respectfully comply with this new requirement," Smith said.

In its guidance, the SEC confirmed that the new requirement applies to all TARP companies, not just those that receive an investor proposal seeking "say on pay." The commission also said that firms may not satisfy the requirement by simply putting such a shareholder proposal on the ballot.

U.S. Senator Christopher Dodd, who inserted the advisory vote provision into the economic stimulus bill, says he believes that hundreds of federally supported financial companies will be required to hold their first "say on pay" votes this year.

In a Feb. 20 letter to Securities and Exchange Commission chair Mary Schapiro, Dodd offered his views on the intent and application of the pay vote terms in the bill and asked the SEC to provide guidance to companies "as soon as practicable." As chairman of the Banking Committee, Dodd played a key role in crafting the final details of the stimulus bill and has oversight authority over the SEC.

While the stimulus legislation did not set a precise date for the first compensation vote at the almost 400 firms that have participated in the federal Troubled Asset Relief Program (TARP), the law directed the SEC to prepare pay vote rules within a year, leading pay-vote proponents to conclude that the first votes would be held in 2010. However, Dodd, in his letter to Schapiro, said his view is that the legislation would mandate advisory votes at TARP firms that file both their preliminary and final proxy statements after Feb. 17, 2009–the date the legislation was signed.

Unlike the forward-reaching compensation rules proposed by the White House and the Treasury Department on Feb. 4, the pay vote provision in the stimulus legislation applies to past and future recipients of TARP assistance until they satisfy their obligations to the government.

Late on Feb. 24, the SEC issued guidance in response to Dodd's letter, but the agency did not address the effective date of the pay vote requirement. If the SEC or the Treasury later confirms that TARP firms must hold advisory votes this year, that would represent a significant expansion of the practice and pave the way for a market-wide rule.

News of Dodd's letter has further emboldened the investor coalition that has filed more than 100 "say on pay" resolutions this season. On Feb. 24, proponents announced that two TARP recipients, American Express and Huntington Bancshares, had agreed to hold advisory votes, according to a press release from the Social Investment Forum. Overall, 18 U.S. companies–including Intel, Occidental Petroleum, and Hewlett-Packard--have endorsed this reform. One of those firms, bond insurer MBIA, refined its policy this week to establish three separate votes on one-time compensation awards, CEO pay, and senior executive compensation.

Proponents, who have submitted "say on pay" proposals at 12 other TARP firms this year, say they will press those companies to "to pledge to implement such votes as soon as possible." Those issuers include: Bank of America, Goldman Sachs, Bank of New York, Morgan Stanley, Fifth Third Bancorp, American International Group, State Street, Wells Fargo, Capital One Financial, Zions Bancorp, South Financial Group, and CoBiz Financial.

"We are clearly moving toward 'say on pay' votes for all companies," Tim Smith, a senior vice president at Walden Asset Management, said in the press release. "We believe that with SEC Chairwoman Schapiro's and Commissioner [Elisse] Walter's support, the strong two-to-one vote in the House in the last Congress, the movement by company leaders and the intense public sentiment on executive pay, it is virtually inevitable that companies will soon be required to implement this policy. The smart thing for corporations to do now is to step forward and voluntarily adopt the 'say on pay' advisory vote."

The Malaysian stock exchange, Bursa Malaysia, released earlier this month a consultation paper inviting comments on proposed amendments to several Listing Requirements. Included in these proposals are changes to the minimum public shareholding spread and the removal of the minimum number of public shareholders required (both at listing and as an ongoing requirement), and proposals for a higher general mandate for the issuance of new securities. Respondents should note that the closing date for comments is Feb. 27, 2009. Comments can be e-mailed to Bursa Malaysia using the appendices provided.

The new U.S. economic stimulus legislation will extend mandatory shareholder votes on executive compensation to almost 400 firms that have received federal assistance, a significant development that should further bolster the investor campaign for such votes. The law also imposes significant new limits on bonuses, which, as some governance observers warn, could undermine pay for performance.

The American Recovery and Reinvestment Act of 2009, signed by President Barack Obama on Feb. 17, directs the Securities and Exchange Commission to issue final rules on non-binding "say on pay" votes within one year. This provision would apply to all companies that have received funds under the Troubled Asset Relief Program (TARP) until they satisfy their financial obligations to the government.

Pay vote advocates expect that the SEC--under the leadership of new chair Mary Schapiro, who has endorsed the concept--will have final rules in place before the 2010 proxy season. Commissioner Elisse Walter also has expressed her support, saying such measures "can help restore investor trust," and lead to "increased shareholder participation," according to the Reuters news service.

It remains to be seen how the stimulus legislation will impact the more than 100 shareholder proposals this proxy season that ask companies to adopt pay vote provisions voluntarily. Some financial firms may agree to conduct advisory votes but hold off on setting the terms until the SEC releases its rules.

James Cox, a securities law professor at Duke University, expects the new legislation will help generate greater support for "say on pay" resolutions and other shareholder proposals related to executive pay. While agreeing that the new pay limits were "probably not as well-targeted as they should have been," he said Congress was trying to respond to the public outcry over the bonuses paid by Merrill Lynch and other taxpayer-supported firms. "People are really disillusioned with corporate America," he said. "Bonuses have become a nasty world in this economy."

Richard Ferlauto, director of corporate governance and pension investment at the American Federation of State, County, and Municipal Employees (AFSCME), said the legislation is "another step in creating a market-wide standard for 'say on pay.'" "We expect to be working with regulators to design specifics for how 'say on pay' will be applied," he said.

New Pay Restrictions
Most of the financial media coverage of the stimulus law has focused on the new pay restrictions for all TARP participants. These limits are far more extensive than those contained in the original financial bailout legislation passed in October or the recent Treasury Department rules for firms that seek "exceptional" assistance in the future.

The new restrictions were added to the bill late in the legislative process by Senate Banking Committee Chair Christopher Dodd over the objections of Obama and the Treasury, according to news reports. Banking industry advocates and other observers warn that the bonus limits will hasten an exodus of executive talent to hedge funds, foreign firms, and others not under the TARP umbrella.

The stimulus law prohibits cash bonuses to certain top executives, other than grants of long-term restricted stock. Such stock grants may not vest until the firm pays back its TARP obligations, may not exceed one-third of the executive's "total annual compensation," and will be subject to other limits set by Treasury. This provision would dramatically impact financial industry pay, which traditionally has included cash bonuses and equity awards that far exceed base salaries.

The number of executives covered by the bonus limits will depend on the amount of federal assistance received. At firms receiving more than $500 million in assistance, the bonus limits would apply to the top five senior executives and at least 20 of the next most highly compensated employees. Fewer executives would be covered at companies receiving less assistance.

The legislation also prohibits severance payments for top executives and directs the Treasury to review past bonuses for the 25 highest-paid employees. The law also bars compensation plans that "would encourage manipulation of the reported earnings . . . to enhance the compensation" for any employees. Critics of the bill, such as consultant Marc Hodak of Hodak Value Advisors, say this language could be interpreted to bar any incentives based on earnings per share or other financial metrics.

While the new legislation does not impose an absolute limit on executive pay, the Treasury previously set a $500,000 limit on the tax deductibility of salary for top executives. Firms conceivably could get around the new bonus limits by increasing base salaries and incurring additional taxes, but Ferlauto of AFSCME notes that these companies will be watched closely by regulators and investors.

It's unclear when these new rules will take effect, but observers expect that the Treasury will issue guidance on these provisions. The law exempts bonuses paid under an employment contract reached by Feb. 11, assuming that contract is deemed valid by the Treasury.

The American Bankers Association warned in a Feb. 18 letter to the Treasury that the stimulus bill may prompt financial firms to delay filing their proxy statements because they are unsure about what they need to include in their pay disclosures or if they need to revise their 2008 results, according to Bloomberg News.

The new limits on bonuses have prompted concern among even well-known critics of executive pay abuses, such as Harvard University law professor Lucian Bebchuk. In a posting on Harvard's Corporate Governance weblog, he warned that the law would undermine pay-for-performance goals. "Mandating that at least two-thirds of an executive's total pay be decoupled from performance, as the stimulus bill does, is a step in the wrong direction," he wrote. Instead, he argues that pay problems "require tightening the link between pay and long-term performance--not giving up on it altogether."

Bebchuk expressed concern that the new limits would give bank executives an incentive to prematurely leave the TARP program, "even when doing so would not be in the bank's best interest." He also cautioned that the law's preference for restricted stock would provide executives an incentive to resist additional share issuances that would greatly dilute the value of their shares, even if the bank needed a capital infusion to survive.

Professor J. Robert Brown of the University of Denver voiced similar criticisms and noted that "capping bonuses still does nothing to guarantee that the board approves a compensation package that is commensurate with an executive's contribution to the company." In a posting on his weblog, he said, "Until the matter is systematically corrected at the board level, problems of excessive executive compensation will remain."

While acknowledging that bonus caps don't work, Ferlauto said he believes the new pay curbs will be "temporary" and provide some "breathing room" as financial market participants develop new pay mechanisms--including "hold until retirement" and bonus escrow provisions--that promote long-term share performance.

The 2009 proxy season promises to be an interesting one, with the market downturn, TARP, and a new administration in Washington all playing contributing roles. How are investors approaching this season? What are the key issues and what are we likely to see on proxy ballots? What is in store for new laws and regulations, and what changes can we expect from the SEC? To address these questions, RiskMetrics will hold a webcast on Thursday, Feb. 19 at 1 p.m. EST.

Panelists David Allegood, Southeast Executive Compensation Practice Leader, Hay Group; Amy Borrus, Deputy Director, Council of Institutional Investors; David Lynn, Partner at Morrison & Foerster LLP and former Chief Counsel of the Division of Corporation Finance at the U.S. Securities and Exchange Commission; and Patrick McGurn, Special Counsel at RiskMetrics Group, will discuss how investors are approaching the season, the key issues, and possible news laws and regulations. Stephen Deane of RiskMetrics' Governance Exchange, will moderate the panel. To register for the webcast, please visit here.

RiskMetrics has also made available a wealth of proxy season 2009 resources for market participants. From informative news articles to the latest data on 2009 shareholder proposals, the proxy season resources page is intended to help market participants navigate the various global seasons. To access these resources, please visit here.

In a surprising reversal, the Securities and Exchange Commission has rejected a request for "no action" relief on a proposal calling for the reform of pay practices and a limit to senior executive compensation at companies receiving federal aid under the Capital Purchase Program of the Troubled Assets Relief Program (TARP).

The decision may be reflective of a change in approach to such proposals under new SEC chairwoman Mary Schapiro.

The reversal is being lauded by SEC watchers. "TARP is one of the most significant policy issues and it's good to see the SEC affirming shareholders' right to have a say on such issues without insisting on word-smithing of fairly straight-forward proposals," said attorney Cornish Hitchcock, who represents labor funds in no action proceedings.

The decision also is significant given that 15 of 22 similar proposal filings tracked by RiskMetrics have been challenged at the SEC. Three have thus far been omitted.

Birmingham, Ala.-based Regions Financial had petitioned the SEC to reject the proposal on the grounds it was "vague and misleading," had been "substantially implemented," and was comprised of multiple proposals, in violation of SEC Rule 14a-8(c). Pointing to an earlier decision by the commission to exclude a similar proposal at SunTrust Banks, Regions relied primarily on the vague and misleading argument noting the proposal appears to impose "no limitation on the duration of the specified reforms." As it normally does, commission staff did not elaborate on why they were rejecting the company's arguments.

Pension plans were under a tremendous amount of stress in 2008, which may create additional risks to the already stressed income statements, balance sheets, and cash flows of corporations.

This report reflects certain key changes related to pension plans that will impact reported results in fiscal 2009: (1) a sharp decline in equity markets in 2008; (2) a sharp decline in bond yields experienced in December 2008, which eliminates the beneficial impact on benefit obligations of higher discount rates that was seen through much of 2008; and (3) the passage of the Worker, Retiree, and Employer Recovery Act ("WRERA") in December 2008, which impacts pension funding requirements.

Reflecting these three key events, we estimate the funded status of plans, the corresponding cash funding requirements, and the overall impact of pension plans on companies' financial health. We conclude that the deterioration in plan assets from declining equity markets and higher bond yields results in significantly lower plan funding on financial statements and appears to offset any relief plans may have received from passage of the WRERA.

To access the key takeaways from this report, please visit here.

For all the talk about board-shareholder dialogue, there has been little information about what goes on when the two sides sit down to talk. A new RiskMetrics report seeks to fill that gap by presenting case studies of six companies whose board members met directly with investors to discuss corporate governance and executive compensation.

In researching and writing the paper, I was struck that everyone interviewed – board directors, corporate executives, and investors – all spoke positively about their experiences. Underlying that unanimity, though, is a wide variety in the approaches that boards are taking in their dialogue with shareholders. Pfizer's directors famously met with the company's largest shareholders in a vigorous two-way discussion on compensation practices. For other companies, such as Bristol-Myers Squibb, the meeting was more of a listening exercise for board directors. The board at McDonald's Corp. brought in a panel of outside experts for a half-day discussion on an issue raised by shareholders. Home Depot engaged in dialogue to rebuild relations with investors. Lead Director Bonnie Hill met with shareholders who were highly critical of the company's compensation practices – and then returned to show how the board had taken their viewpoints into account. UnitedHealth engages with shareholders in two ways: on an ad hoc basis, and in a separate, formal shareholder advisory committee on board nominations. Occidental Petroleum has adopted features of a road show in an expanding series of meetings with investors.

Late last month, when Oxy announced that its board had approved a Say on Pay policy and would support federal "say on pay" legislation, Chairman and CEO Ray R. Irani paid tribute to the dialogue. He observed, "In recent years, we have engaged in direct discussions with stockholders on various important governance issues, including 'say-on-pay'…"

Looking ahead, the market downturn will likely spark a rise in board-shareholder dialogue.

To find Key Findings from the report, please click here.

The full version of the report is available on Governance Exchange – an online community exclusively for board directors, corporate executives, and institutional investors. Governance Exchange provides an innovative, secure and high-quality online environment to facilitate constructive dialogue on corporate governance. For more information on Governance Exchange, please click here.

In a time of economic turmoil and crisis of confidence, it should not be surprising that accounting rules are again in the spotlight with accounting standard setters and regulators having been very active as of late. In fact, at last month's annual AICPA Conference on SEC & PCAOB Developments, many speakers came with a similar message for the large gathering of accountants and auditors: during times of stress, management is more prone to resort to aggressive accounting tactics and fraud. While we all know that analyzing companies in this difficult environment requires fine-tuned antennae and an extra dose of healthy skepticism, it is important to remember to be especially cautious around metrics that companies accentuate as measures of their financial health – particularly non-GAAP or newly-introduced metrics that are emphasized to investors but are not subject to rigorous audit procedures. In addition, new proposals are rapidly being rolled out and fast-tracked, and several accounting paradigm shifts are under serious consideration. We expect this rapid pace to continue throughout 2009.

To keep market participants better informed on all the accounting and financial reporting changes in 2009, RiskMetrics will hold a webcast on Wednesday, February 11 at 11 a.m. EST. Dan Mahoney and Jeremy Perler, RiskMetrics Group's co-heads of Accounting Research, will discuss critical accounting and financial reporting hot topics that investors should watch in 2009, including mark-to-market accounting, changes to accounting for off-balance sheet entities, new rules surrounding business combinations, implications of pension accounting, the status of US GAAP convergence with IFRS, proposed changes to revenue recognition standards, and other emerging issues.

To register for the webcast, please visit here. Registrants will also receive a copy of the key takeaways from the report on accounting and financial reporting trends in 2009.

Consumer and technology companies are already feeling powerful ripples from climate change. With massive operations and supply chains that will be tested by global warming regulations, these companies also have enormous opportunities due to rising consumer demands for climate-friendly products.

Ceres, a leading coalition of investors, environmental organizations and other public interest groups working to address sustainability challenges such as global climate change, and the Investor Network on Climate Risk has recently published a comprehensive assessment, authored by RiskMetrics Group's Climate Change Research Group, of how 63 of the world's largest consumer and information technology companies are preparing themselves to meet the colossal challenge of climate change.

Please join us for a discussion on the findings from the report, as well as how these companies are minimizing climate risks while maximizing climate-friendly opportunities. Speakers will include Anne Kelly, Director of Governance Programs for Ceres and Doug Cogan, Director of Climate Risk Management at RiskMetrics Group.

To register for this webcast, please visit here.