The new financial regulatory overhaul law brings a sweeping transformation to corporate governance, bolstering oversight on executive compensation and expanding share-holder power in the boardroom.
At the same time, the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Barack Obama on July 21, adds oversight responsibilities to corporate boards on pay issues.
“It will be year-round constant friction” between shareholders, especially large shareholders, and corporate boards and management, said John D. Martini, Phila-delphia-based partner in the law firm of Reed Smith LLP. Some of the executive compensation provisions encourage “class warfare,” he added.
Experts say key provisions of the bill intensify the scrutiny on executive compensation by requiring:
c companies to give shareholders at least once every three years a non-binding vote on executive compensation, starting with annual meetings, and a separate shareholder vote at least every six years to determine whether the frequency of the say-on-pay will be every one, two or three years;
c a shareholder vote on golden parachutes related to a merger, acquisition or other change in corporate control, effective next January. The vote would cover any type of compensation, whether current, deferred or contingent;
c institutional investors that filed 13(f) quarterly reports on equity holdings to disclose at least annually how they voted on say-on-pay and golden parachutes proxy proposals;
c compensation committees of boards to include only independent directors. New exchange listing standards toughen the definition of independence, including a director's affiliations and sources of compensation related to the company that could pose conflicts. The bill excludes from the committees directors on boards affiliated with large shareholders, such as private equity funds.
c companies to calculate and disclose every year the median total annual compensation of all employees except the CEO and the annual total compensation of the CEO, as well as the ratio of the two amounts;
c disclosure of the relationship between executive compensation and total return of the company's stock, including dividends;
c enhanced executive compensation disclosure in corporate proxy statements; and
c compensation committees to have discretion whether to hire independent compensation consultants, legal counsel and other advisers. Companies have to disclose the advice consultants provide the committee — whether or not the advice is followed — and any conflicts of interests of the consultants and how conflicts are being addressed.
The key corporate governance provision in the new law authorizes the Securities and Exchange Commission to grant shareholder access to the corporate proxy materials to nominate directors. It directs the SEC to set rules on proxy access.
Herbert F. Kozlov, New York-based partner at Reed Smith, said: “We expect the SEC to act to make proxy access rules effective for the 2011 proxy season.
“You may see a snowball effect. ... As proxy access becomes more successful (as shareholder nominees win election to boards) you may see” companies facing more shareholder nominees.