Executive compensation and governance-related reforms propose extensive changes to procedure and disclosure | Practical Law

Executive compensation and governance-related reforms propose extensive changes to procedure and disclosure | Practical Law

Executive compensation and governance-related reforms propose extensive changes to procedure and disclosure

Executive compensation and governance-related reforms propose extensive changes to procedure and disclosure

by Doreen E. Lilienfeld, Amy B. Gitlitz and Kenneth H. Hemler, Shearman & Sterling LLP
Published on 11 Aug 2009 • USA (National/Federal)
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The SEC, Treasury Department and Congress have released proposals for far reaching reforms to executive compensation disclosure and practice. This article summarises some of the key measures contained in their proposals.
In July 2009, the Securities and Exchange Commission (SEC), the Department of the Treasury (Treasury) and Congress released proposals that stand to change the landscape of executive compensation disclosure and practice. While many aspects of the proposals were long anticipated, the sheer volume of the changes, the breadth of the new requirements and the resulting disclosure will garner much attention over the coming months.
At its open meeting on 1 July 2009, the SEC approved proposed rules implementing "say-on-pay" for public companies that received financial assistance under the Troubled Assets Relief Program (TARP). These proposed rules implement the say-on-pay provisions of the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009 (TARP Say-on-Pay Rules).
The TARP Say-on-Pay Rules require a registrant that has received or will receive financial assistance under TARP to hold a non-binding shareholder vote on executive compensation at meetings during which proxies are solicited for the election of directors. This separate shareholder vote would apply to the compensation discussion and analysis and tabular disclosures in the registrant's proxy statement.
On 1 July 2009, the SEC also proposed amendments to its executive compensation and corporate governance disclosure rules for all public companies. These amendments, which were finally set out in an SEC release issued on 10 July 2009, would require:
  • Discussions of the relationship between risk assessment and compensation programmes for employees generally (including non-executives).
  • Disclosure of the aggregate grant date fair value of equity awards in the summary compensation table and director compensation table.
  • Enhanced narrative disclosure of director qualifications, the registrant's leadership structure, and the board's role in risk management.
  • Disclosure of conflicts of interest involving compensation consultants.
  • Reporting shareholder vote results on Form 8-K within four business days after the meeting at which the vote is held.
On 16 July 2009, Treasury issued a press release indicating its support for draft legislation that would make say-on-pay mandatory for all US public companies, not just recipients of financial assistance under TARP. It accompanied the press release with draft legislation captioned the Investor Protection Act of 2009 (Investor Protection Act) that adds to the federal substantive law regulating pay. The Investor Protection Act:
  • Implements say-on-pay for all US public companies.
  • Mandates a separate vote on golden parachutes in the context of mergers or acquisitions, with "clear and simple" disclosure of the amounts executives will receive.
  • Establishes independence standards for compensation committee members, compensation consultants, outside counsel, and other compensation committee advisors.
  • Requires that compensation committees be given the authority and funding to hire independent compensation consultants, legal counsel, and other advisors when negotiating executive compensation packages.
Several proposed reforms targeted at executive compensation and corporate governance have also been circulated in Congress in recent months. On 17 July 2009, Representative Barney Frank, Chairman of the House Financial Services Committee, circulated a discussion draft of proposed legislation entitled the Corporate and Financial Institution Compensation Fairness Act of 2009 (Fairness Act). This incorporates the requirements of the Investor Protection Act, but also directs the SEC, the Federal Reserve, and other federal regulators to jointly prepare regulations requiring financial institutions to describe the structure of their incentive-based compensation arrangements. This requirement is intended to enable regulators to determine whether the compensation structure meets criteria that the agencies establish to reduce unreasonable incentives for executives and other employees to take undue risks that could have serious adverse effects on the institution.
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