Bill Mandating Shareholder Advisory Vote on Executive Compensation Goes to Full House

A bill requiring public companies to include in their annual proxies a separate non-binding advisory shareholder vote on their executive compensation plans has been favorably reported out of the House Financial Services Committee to the floor of the House. Introduced by committee chair Barney Frank, 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.

The bill was reported out with no committee report. An amendment during mark-up by Mr. Frank delays the advisory vote until 2009. The committee emphasized that the shareholder vote is advisory in nature, which means that the board and the CEO of a company can ignore the will of the shareholders if they so choose.

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.

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.