Friday, April 29, 2011

Private Equity Funds Bid for Representation on Compensation Committees in Wake of Dodd-Frank

As part of the SEC's proposed rules implementing Dodd-Frank provisions requiring fully independent compensation committees, the Private Equity Growth Capital Council requests that the exchanges and the Commission allow representation on the committees of private equity fund shareholders. In a letter to the SEC, the council said that, unlike audit committees, which are concerned with the objective oversight of the company, compensation committees review and adjust compensation.

In the case of audit committees, the Council recognizes the concern that large private equity shareholders may not have the same interest as other shareholders in full disclosure. But with compensation committees, the private equity shareholder is fully aligned with all the other company shareholders. Thus, the Council asks the exchanges and the SEC to show a little more flexibility with the compensation committee independence standards. The per se affiliate bans applied to audit committee independence are neither appropriate nor necessary in the compensation committee context, where flexibility should be the watchword.

Section 952 of the Dodd-Frank Act adds Section 10C to the Securities Exchange Act directing the national securities exchanges to establish listing standards requiring each member of an issuer’s compensation committee to be a member of the board of directors of the issuer and to be independent.

The PEGCC understands that Section 952 of the Dodd-Frank Act was adopted in large part to address perceived abuses and conflicts of interest in the area of executive compensation, including the perception that compensation committees of some public companies were too lax in overseeing executive compensation arrangements, or that those committees, due to a lack of independence, were willing to award excessive management compensation not appropriately linked to performance, at the expense of shareholders and the health of the company in question.

The PEGCC acknowledges the importance of compensation committees that are independent from management and the importance of rigorous oversight of compensation decisions, which they said is a role regularly undertaken by representatives of private equity equity funds serving on portfolio company boards and board committees. The PEGCC also supports the general approach taken in the Proposing Release and the decision by the Commission to leave to the exchanges decisions concerning compensation committee independence.