On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law. Designed primarily to reform the financial regulatory system, the Act also contains a number of corporate governance provisions that will affect public companies, including provisions requiring say-on-pay and golden parachute shareholder votes, shoring up the SEC's authority to adopt shareholder access rules, mandating additional public company disclosures and more. The Act also relieves smaller public companies from the requirement of providing auditor attestation under Section 404 of the Sarbanes-Oxley Act.

Although the requirement for majority voting in director elections was eliminated and the say-on-pay provisions were made more obtuse by the conference committee, the Act preserves most of the features relating to corporate governance and executive compensation contained in the version of the bill passed by the Senate.

Shareholder Approval of Executive Compensation. Section 951 of the Act adds a new Section 14A to the Securities Exchange Act of 1934 (the “Exchange Act”) that will require companies that provide executive compensation disclosure under the SEC’s proxy rules to include nonbinding “say-on-pay” proposals in their proxy statements at least once every three years, and nonbinding proposals to approve any “golden parachute” arrangement in all proxy statements relating to business combinations.

  • Say-on-Pay. New Section 14A will require companies to include two matters in the first proxy statement that contains executive compensation disclosure for a meeting occurring on or after January 21, 2011: (1) a nonbinding resolution for shareholder approval of executive compensation as disclosed in the proxy statement, and (2) a nonbinding proposal to determine whether this “say-on-pay vote” should occur once every one, two, or three years. After this first vote, the say-on-pay proposal must be submitted to shareholders at least once every three years and the proposal to consider the frequency of the say-on-pay proposal must be submitted to shareholders at least once every six years.

    Public company recipients of TARP funds will find this “new” requirement less restrictive than requirements to which they are already subject: a public TARP recipient is required to include a say-on-pay proposal in the proxy statement for its annual meeting every year. Many other companies have either voluntarily included nonbinding say-on-pay proposals in their annual proxy statements, or been pressured by shareholder advocacy groups to include the proposals. In all but a very limited number of cases, these proposals have historically passed with little difficulty. Importantly, however, the Act will also prohibit brokerage firms from voting the shares they hold in “street name” on behalf of customers who fail to give them direction “for” the say-on-pay proposals (see below). Accordingly, although we believe that companies with conservative compensation policies will have no difficulty with this new requirement, public companies that are more aggressive may find that they are under increasing shareholder pressure to change their policies, even if the pressure is “nonbinding.”


  •  Golden Parachute Approval. Effective for any meeting that occurs on or after January 21, 2011, new Section 14A will also require companies to include in any proxy statement subject to the SEC’s proxy rules at which shareholders are asked to approve a merger or other business combination transaction:

    (1) disclosure “in a clear and simple form in accordance with regulations promulgated by the [SEC]” of agreements or understandings with named executive officers under which the officers will receive any payments as a result of the transaction; and

    (2) a nonbinding resolution to approve the payments to the named executive officers.

    Although the form of the disclosure might change as a result of the new rules the Act requires the SEC to promulgate, well prepared proxy statements relating to business combinations have always included disclosure of parachute arrangements for executive officers. The requirement for a “say on parachute pay” is new, but its impact may be limited in instances where there is a partial or complete change in board composition as a result of the business combination.

    Section 14A will also require institutional investment managers that are subject to Section 13(f) of the Exchange Act to annually report how they vote on all say-on-pay and golden parachute proposals.

    The Act specifically allows the SEC to exempt classes of issuers from the say-on-pay and golden parachute requirements, with particular focus on small issuers if the SEC determines that they will be unduly burdened.

Broker Discretionary Votes. Although separate from the corporate governance provisions, Section 957 of the Act might have more impact on corporate governance than Section 951. Mirroring the changes of last summer caused by the passage of New York Stock Exchange Rule 452, and effective immediately, Section 957 prohibits brokers from voting on matters related to the election of directors, executive compensation or other significant matters as determined by the SEC, unless the broker has received voting instructions from the beneficial owner. The provision marks a reversal of the SEC’s conclusion, in January 2010, that brokers may exercise discretionary authority in voting for say-on-pay proposals that are required under TARP, and might mark the end of “easy approval” of say-on-pay votes.

Executive Compensation Disclosure—Pay versus Performance. Section 953 of the Act also amends Section 14 of the Exchange Act to require that the SEC adopt regulations (without a specific rulemaking deadline) requiring companies to disclose in their proxy statements the relationship between the amount of executive compensation actually paid to executive officers and the financial performance of the company. Section 953 also effectively invites the SEC to require that this information be presented graphically. More specifically, Section 953 directs the SEC to amend its executive compensation rule (Item 402 of Regulation S-K) to require disclosure of the:

(1) median total annual compensation paid to all employees other than the chief executive officer;

(2) the total annual compensation paid to the chief executive officer; and

(3) the ratio between these two amounts.

In what may create a burden for smaller companies that do not have computerized compensation records or that have broad-based equity compensation plans, the Act requires that total compensation both for purposes of executive compensation and for purposes of median employee compensation be computed in the same manner as total compensation is computed for executives in the summary compensation table.

It is unclear whether the SEC’s rules will require graphic representation of the relationship between executive pay and median employee compensation, but the rules seem at least partially focused on that statistic.

Leadership Structure. Section 972 of the Act adds a new Section 14B to the Exchange Act that requires the SEC to issue rules on or before January 17, 2011 requiring disclosure in proxy statements of why the issuer has chosen to have the same person or different persons serving as the Chairman of the Board and the Chief Executive Officer. Because the SEC adopted last December rules that already require disclosure of whether the same person serves as Chairman and CEO (Regulation S-K, Item 407(h)), and virtually all issuers have included descriptions of why, this change seems designed only to codify the requirement.

Proxy Access. Section 971 adds a new subsection (1) to Section 14(a) of the Exchange Act that gives the SEC explicit authority to issue rules permitting shareholder access to proxy materials in order to nominate candidates to the Board of Directors. The SEC is also authorized to establish exemptions for certain issuers and will consider whether the requirements of proxy access disproportionately burden smaller issuers. Before enactment of the Act, the SEC issued a concept release asking for public comment on the effectiveness of its proxy rules and whether rules should be published to promote greater efficiency and transparency. These changes, together with a comprehensive proxy access rule, are expected later this year.

Disclosure of Hedging Policies. Section 955 of the Act adds a new subsection (j) to Section 14 of the Exchange Act that requires the SEC to issue rules (without any explicit rulemaking deadline) requiring public companies to disclose in their proxy statements whether directors and employees are permitted to hedge the value of equity securities held directly or indirectly by the director or employee. Unlike Section 16(c) of the Exchange Act, which prohibits only short sale transactions by officers and directors, this new rule will likely prompt the adoption of more comprehensive anti-hedging policies that apply to all hedging transactions and to all employees.

Additional Requirements for Listed Companies. The Act also adds new Sections 10C and 10D to the Exchange Act requiring the SEC to adopt regulations that will prohibit national securities exchanges or associations from listing companies that do not have independent compensation committees or that have not adopted clawback policies.

  • Compensation Committee Independence. Section 952 of the Act requires the SEC to adopt, on or before July 16, 2011, a rule that will prohibit the listing of issuers that do not have independent compensation committees. Given the existing requirements of the NYSE, the Nasdaq, and the AMEX for independence of compensation committee members, or for decision making on executive compensation by disinterested members of the board, and the exemptive authority of the SEC provided by Section 952, particularly as it relates to smaller issuers, these rules are likely to have very little impact on currently listed companies.

  • Independence of Compensation Committee Advisers. As part of the new compensation committee independence rules, Section 952 also requires the compensation committee of a listed issuer to have authority to retain independent compensation consultants, legal counsel and other advisors, each of whom will report directly to, and be compensated by, the compensation committee. Although most listed issuers are already subject to these requirements as they relate to compensation committees, few issuers have adopted policies that require independent compensation of legal counsel by compensation committees. It is unclear whether the requirement for direct compensation by the compensation committee will require separate engagement of legal counsel.

    In the proxy statement for any meeting occurring after July 21, 2011, the issuer must disclose whether the compensation committee has retained a compensation consultant and whether any conflicts of interest exist with respect to the compensation consultant. The same requirement does not apply as to legal counsel or other advisers.

    The SEC is also directed to study the use of compensation consultants and to submit a report to Congress about such use within two years.


  • Clawback of Executive Compensation. Section 954 of the Act creates new Section 10D of the Exchange Act, which requires the SEC to adopt rules (without an explicit rulemaking deadline) prohibiting the listing on a national securities exchange of any issuer that has not adopted a clawback policy consistent with the section. The policy required under the section will require the issuer to recover from any current or former executive officer any incentive compensation that was paid during the three years preceding any accounting restatement due to material noncompliance with reporting requirements, to the extent in excess of the compensation that would have been paid based on the restatement. Importantly, unlike Section 304 of Sarbanes-Oxley, the new clawback policies will apply (1) regardless of the misconduct of the officer receiving incentive compensation, and regardless of misconduct by the issuer, (2) to all incentive compensation paid during the three year period preceding the restatement, rather than the 12 months following publication of the erroneous report, and (3) to all executive officers, not just the Chief Executive Officer and Chief Financial Officer.

    For listed companies, new Section 10D requires the SEC to also adopt rules that require the issuer to develop a policy relating to disclosure of the clawback policy—presumably in the annual proxy statement.

SOX 404 Amendments
In a tacit acknowledgement of the burdens excessive rulemaking can impose, Section 989G of the Act expressly exempts issuers that are neither “large accelerated filers” nor “accelerated filers” from the requirement contained in Section 404(b) of The Sarbanes Oxley Act of 2002 to provide an auditor attestation of internal control over financial reporting. In the next nine months, the SEC is also required to conduct a study to determine how to reduce the burden of complying with Section 404(b) for companies whose market capitalization is between $75 million and $250 million while maintaining investor protections. The study is also to consider whether the reduction or elimination of this compliance burden would encourage companies to list on U.S. stock exchanges for their IPOs.

Next Steps
Like many other provisions of the Act, the impact of the corporate governance and executive compensation provisions will not be clear until the SEC issues the regulations required by the Act. Nevertheless, it is clear that the elimination of discretionary voting combined with say-on-pay will create increasing pressure on, and the potential for criticism of, compensation committees for pay decisions recently made, or that are currently being made, for calendar year companies. If, as is likely given the SEC’s appetite for increased compensation scrutiny, new regulations for specific pay versus performance statistics are issued prior to next year’s proxy season, it is possible that we will witness a large number of failed say-on-pay votes next spring.