By James Hamilton, J.D., LL.M.
The House Financial Services Committee has published a committee report (110-088) to accompany Barney Frank’s Shareholder Vote on Executive Compensation Act (HR 1257), which was reported out of committee on April 16, 2007. The bill was reported out with no committee report
The committee report states that the Act requires companies to include in their annual proxies a nonbinding shareholder vote on their executive compensation disclosures; and hold an additional nonbinding advisory vote if the company awards a new golden parachute package while simultaneously negotiating the purchase or sale of the company.
The report explains that the rare second vote is designed to help address a CEO's natural conflict of interest when negotiating the price of a company while simultaneously negotiating an additional personal exit package. The fear is that CEOs may be willing to sell the company for less or pay more for another if they personally receive a larger package, thereby reducing shareholder value. The report clarifies that this provision would not apply to long-disclosed change in ownership agreements; and would only apply to new provisions added while negotiating the sale/purchase.
The report states that the annual nonbinding advisory vote is designed to give shareholders a mechanism for supporting or opposing a company's executive compensation plan without micromanaging the company. Knowing that they will be subject to some collective shareholder action will help give boards more pause before approving a questionable compensation plan. As is the case in other countries, the committee expects this tool will improve dialogue between management and shareholders on compensation and make compensation a more efficient tool for improving and rewarding management performance.