Monday, June 21, 2010

House and Senate Conferees Reaching Consensus on Corporate Governance Provisions

House and Senate conferees have completed a great deal of agreement on the corporate governance provisions of the financial reform legislation, There will be a requirement for a non-binding shareholder advisory vote on executive compensation in the final legislation. But the Senate rejected a shareholder advisory vote for golden parachutes, as was in the House version.

However, the Senate did agree to a House provision requiring institutional investment managers to annually disclose how they voted on any shareholder advisory vote on executive compensation unless the vote is otherwise required to be reported publicly by SEC regulations. As of this writing, the conferees had not settled on a final proxy access provisions. Both House and Senate bills authorize the SEC to adopt proxy access rules, but the Senate proposes to add 5 percent ownership and two-year holding period requirements.

The legislation will mandate that each member of the board of directors compensation committee be an independent board member. But the legislation specifically exempts registered mutual funds, controlled companies, companies in bankruptcy, limited partnerships and foreign private issuers that provide annual disclosures to shareholders of the reason that they do not have an independent compensation committee.

The compensation committee may, in its sole discretion, retain and obtain the advice of a compensation consultant meeting SEC independence standards. The compensation committee will be directly responsible for the consultant’s appointment, compensation and oversight. This oversight cannot be construed to require the compensation committee to implement or follow the consultant’s advice, and cannot otherwise affect the committee’s ability or obligation to exercise its own judgment.

The conference struck out a provision requiring the SEC to adopt rules providing that in an uncontested election a director receiving a majority of the votes cast must be deemed to be elected.

It is widely acknowledged that a sound corporate governance practice is to bifurcate the roles of board chairman and CEO. Thus, the legislation would direct the SEC to adopt rules requiring a company to disclose in the annual proxy sent to investors the reasons why it has chosen the same person to serve as chairman of the board of directors and chief executive officer or why it has chosen different individuals to serve as board chair and chief executive officer.

The legislation directs the SEC to require companies to disclose in their annual proxy statement a clear description of any compensation required to be disclosed under the SEC executive compensation forms and information that shows the relationship between executive compensation and the company’s financial performance, taking into account the change in the value of the shares, dividends and distributions.

In addition, the legislation requires the SEC to amend Item 402 of Regulation S-K to mandate disclosure of the median of the annual total compensation of all employees, except the CEO; the annual total compensation of the CEO; and the ratio of the two. The annual total compensation of an employee must be determined by reference to Item 402 of Regulation S-K. This disclosure is required in annual reports and proxy statements, among other filings. The legislation requires public companies to set policies to claw back incentive-based executive compensation if it was based on inaccurate financial statements that don't comply with accounting standards.

The SEC is also directed to adopt rules requiring a company to disclose whether any employee or director is permitted to purchase financial instruments, including derivatives such as equity swaps, that are designed to hedge or offset any decrease in the market value of equity securities granted to the employee or director by the company as part of the compensation of the employee or directors or held directly or indirectly by the employee or director.

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