Bill Would Require Shareholder Advisory Vote on Executive Compensation

House Financial Services Committee Chairman Barney Frank has introduced a bill requiring public companies to include in their annual proxies a separate non-binding advisory shareholder vote on their executive compensation plans. The Shareholder Vote on Executive Compensation Act (HR 1257) is designed to ensure that shareholders have an opportunity to give their approval or disapproval on the company’s executive pay practices. As such, the bill represents a market-based approach that empowers shareholders to review and approve their company's comprehensive executive compensation plan. In that spirit, the bill would not establish any artificial restrictions on executive compensation. A similar bill introduced by Rep. Frank in the 109th Congress died in committee.

The bill also contains a separate advisory vote if a company gives a new, not yet disclosed, golden parachute to executives while simultaneously negotiating to buy or sell a company. This provision is designed to empower shareholders to protect themselves from senior management's natural conflict of interest when negotiating an agreement to buy or sell a company while simultaneously negotiating a personal compensation package.

The bill is designed to build on the SEC’s recently adopted executive compensation rules. The SEC is charged with rulemaking to implement the provisions of the legislation within one year of its enactment.

Shareholder advisory votes on executive compensation are mandated in the United Kingdom and other EU jurisdictions. The UK Companies Act requires a shareholder advisory vote on the directors’ remuneration report. In the Netherlands, a principle of the Tabaksblat Code on corporate governance provides that the supervisory board’s remuneration policy must be submitted to the shareholders for adoption.