A bill (S 2866) recently introduced by Senator Hillary Clinton would require a voluntary shareholder advisory vote on a company’s executive compensation package. The bill is similar to a measure that passed the House last year requiring that companies include in their annual proxy to investors the opportunity cast a non-binding vote on the company’s executive pay packages. In 2006, the SEC took a major step forward by requiring that companies significantly improve their executive compensation disclosures to shareholders. Financial Services Committee Chair Barney Frank believes that these measures are needed because the SEC-mandated disclosure, while important, is incomplete. On the day the House bill passed, April 20, 2007, Sen. Barack Obama introduced a companion bill in the Senate (S 1181) requiring a shareholder advisory vote on executive compensation.
The bills also contain 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.
These measures are designed to ensure that shareholders have an opportunity to give their approval or disapproval on the company’s executive pay practices. As such, they represent a market-based approach empowering shareholders to review and approve their company's comprehensive executive compensation plan. In that spirit, the bills do not establish any artificial restrictions on executive compensation, nor do they seek to set any form or measure of executive compensation. 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.
According to Rep. Frank, the bills in no way intrude Congress or the SEC into the process of setting management compensation. That said, the House financial services chair does believe that boards of directors are not likely to disregard an advisory opinion from the shareholders. As a matter of sound corporate governance, observed Rep. Frank, Congress feels that the advisory vote is important input that the board should have.
The Clinton bill would go further than the Frank and Obama bills and amend Section 304 of Sarbanes-Oxley, which requires forfeiture of incentive-based executive compensation when misconduct leads to an accounting restatement, to increase the look back period to 36 months from 12 months. The bill would also direct the SEC to adopt regulations defining misconduct to include the backdating of stock options to conceal losses or any other negative financial information from investors. Misconduct must also include accounting irregularities designed to conceal losses, liabilities, or other negative financial information or to artificially achieve profit or other financial targets that would not have reasonably been met under GAAP.
The Clinton measure also directs the SEC to adopt regulations prohibiting any work by a compensation consultant on behalf of the company that compromises the independence of the consultant. Companies would have to certify if a compensation consultant is independent.