By James Hamilton, J.D., LL.M.
A bill requiring public companies to allow a non-binding advisory shareholder vote on corporate executive compensation plans has passed the House of Representatives by a vote of 269-134. On the day of passage, April 20, 2007, Sen. Barack Obama introduced a companion bill in the Senate (S 1181) requiring a shareholder advisory vote on executive compensation.
The House bill requires that companies include in their annual proxy to investors the opportunity to vote on the company’s executive pay packages. This is an advisory vote that in no way binds the company’s board. And, the bill does not attempt to cap executive compensation or dictate the form of such compensation. According to Rep. Barney Frank, the Act in no way intrudes Congress or the SEC into the process of setting management compensation. That said, the House Financial Services Committee chair does believe that boards of directors are not likely to disregard an advisory opinion from the shareholders.
The Shareholder Vote on Executive Compensation Act (H 1257) 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 rare second vote 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.
An amendment during mark-up by Mr. Frank, who sponsored the Act, delays the shareholder advisory vote until 2009. According to Rep. Frank, the effective date of the Act was delayed at the request of the Business Roundtable so there would be no burden in paperwork on companies. (Cong. Rec., Apr 20, 2007, H3706).