October 22, 2010

Jim Hanks quoted extensively on corporate governance in REIT Magazine

3 min

Venable partner Jim Hanks was quoted extensively in an article on corporate governance that appeared in the September/October issue of REIT Magazine.

The recent financial crisis has caused shareholders to demand greater transparency in corporate governance matters, which Hanks defines as "a range of legally permissible choices principally concerning the allocation of power and responsibility among the shareholders, the board and management."

Discussing the increased scrutiny REITs are facing, Hanks observed that "the focus on corporate governance today is both much broader and much deeper than ever before. The biggest difference from 10 years ago is that far less deference is given to the role of the board as the overseer of management. Another big difference is the increasing separation and activism of shareholders with a short-term investment horizon from shareholders with longer-term investment horizons."

Hanks listed some of the milestone events that have occurred during the last decade that have had an impact on corporate governance practices. These include the Enron scandal of 2001, the Sarbanes-Oxley Act of 2002, the collapse of Lehman Brothers and the global financial crisis, and this year's passage of the Dodd-Frank Act.

The article notes that in addition to the typical "standbys" that have dominated corporate governance discussions in the past—executive compensation, the composition of boards of directors, shareholders' voting rights and takeover defenses—issues such as risk management and credit ratings are now commanding attention.

However, Hanks cautioned against trends in reducing board power and providing openings for hostile takeovers of companies. "Giving the shareholders more power sounds good, but it ignores the basic facts that, first, the board is elected by the shareholders; second, the board has more information than any shareholder; and third, the directors have fiduciary or other legal duties to the company and shareholders that shareholders do not have," he said. "Telling a company that it shouldn't have reasonable takeover defenses, for example, second-guesses the board on a matter that the courts—and many legislatures, like Maryland's—have said for years is well within the board's business judgment. There are lots of empirical data indicating a positive correlation between takeover defenses and both economic performance and higher sale premiums."

Hanks was also quoted in the same issue of REIT Magazine on the new proxy access rules promulgated by the Securities and Exchange Commission (SEC). According to Hanks, the rules—which stipulate that owners of at least 3 percent of a company's stock for 3 years can have their nominees for board seats included in the company's own proxy materials—are as likely to destabilize companies as to improve corporate governance.

Noting that the SEC is currently soliciting comments on the broader proxy solicitation process, Hanks said, "it would be surprising if new regulations or legislation were not proposed. If so, they are likely to further intrude on the historic power of the states and companies to govern the manner and rights of share ownership; the form, content and solicitation of proxies; record dates; service providers; and voting tabulation."