By James Hamilton, J.D., LL.M.
It has become clear that Senator Barack Obama would make non-binding shareholder advisory votes on executive compensation a securities regulation legislative priority should he be elected President. After the House passed a bill requiring that companies include in their annual proxy to investors the opportunity cast a non-binding vote on the company’s executive pay packages, Sen. Obama introduced a companion bill (S 1181) requiring a shareholder advisory vote on executive compensation. The bill is currently in the Senate Banking Committee.
In 2006, the SEC took a major step forward by requiring that companies significantly improve their executive compensation disclosures to shareholders. House Financial Services Committee Chair Barney Frank believes that these measures are needed because the SEC-mandated disclosure, while important, is incomplete.
In a speech in Indianapolis earlier this year, Sen. Obama said he introduced the legislation based on his belief that some senior executives were being generously rewarded despite the fact that they were not doing a good for their shareholders, which, he said, contradicted the basic American value that good and successful work should be rewarded. The legislation would give shareholders a voice in what senior officers are getting paid and ensure that companies disclose the rationale for the executive compensation.
Both the House and Obama bills also mandate a separate non-binding 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.