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9.12 Corporate Governance and Executive Compensation

<< Title IX Overview

9.12 Corporate Governance and Executive Compensation

The following links provide expanded analysis within this section:


            9.12.                 Corporate Governance and Executive Compensation.  The Act includes a number of provisions intended to enhance shareholder understanding of executive compensation and to increase shareholder involvement in the compensation process.  The Act also has provisions that impose substantive requirements in regard to compensation activities.  All but one of these provisions apply only to public companies, and, in some instances, are further limited to only listed companies.  These measures include:

  • "say on pay" provisions whereby companies are required to hold non-binding votes on executive compensation and golden parachutes;
  • requiring  that members of compensation committees be independent directors;
  • disclosure comparing company performance with executive compensation paid and the ratio of the chief executive officer's compensation to that of the median of all other employees of the company;
  • a prohibition on the payment by certain financial companies, including banks and BHCs, of incentive compensation that provides excessive compensation or that could lead to material financial loss;  
  • "clawback" provisions that provide compensation awarded to executives who have engaged in wrongdoing are required to pay back their compensation to the company;
  • disclosure regarding whether the roles of CEO and Chairman have been separated;
  • restrict proxy voting by brokers on behalf of security holders; and
  • authorize the SEC to permit shareholders to nominate nominees for board positions.

9.12.1.  Shareholder Vote on Executive Compensation.  Not less than once every three years, a proxy, consent or other authorization in connection with an annual or other shareholder meeting for which compensation disclosure is required under the proxy rules shall include a non-binding resolution to approve the compensation of the executives.  These requirements supplement existing proxy rules on executive compensation applicable to public companies.  The company's shareholders are to determine in a separate vote whether the compensation vote described above should be every 1, 2 or 3 years.  This vote on the frequency shall be not less than once every six years.  These requirements go into effect six months following enactment. [§951]  

                        9.12.2.  Disclosure and Vote on Golden Parachutes.  Within six months of enactment of the Act, in every proxy, consent or authorization relating to shareholder approval of merger, acquisitions or similar transactions involving a public company, the person making the solicitation shall disclose any agreements or understandings with any named executive officer for compensation that is based on the transaction, the total of the compensation, and the conditions of paying the compensation.  In addition, the proxy, consent or authorization shall provide for a separate non-binding resolution to vote on the golden parachute arrangement.

The SEC is directed to adopt regulations to create a form for the golden parachute disclosure.

                        9.12.3.  Shareholder Votes Are Nonbinding. The Act provides that shareholder votes on executive compensation and golden parachute are non-binding and should not be construed to overrule a decision by the issuer or board of the issuer; they do not create or imply a change in the fiduciary duties (or a new fiduciary duty) of the issuer or board nor do they restrict or limit any shareholder compensation proposals.

                        9.12.4.  Disclosure of Votes by Institutional Investment Managers.  Institutional investors that are subject to 13F reporting (generally more than $100 million under management), are required to disclose votes on executive compensation and golden parachute proposals.

                        9.12.5.  Exemptions.  The SEC may, by rule, exempt an issuer or class of issuers from the executive compensation and golden parachute proposals.  In determining whether to grant an exemption, the SEC is instructed to determine whether the requirements "unduly burden" small issuers.

                        9.12.6.  Compensation Committee Independence. 

                                    9.12.6.1.  General Independence Requirements.  National securities exchanges and national securities associations will be prohibited from listing any equity security that does not conform to the requirement that each member of the issuer's compensation committee be (i) a board member and (ii) independent. [§952]

                                    9.12.6.2.  Exclusions.  Controlled companies (i.e., 50% voting power held by individual, group or other issuer), limited partnerships, open-end investment companies, companies in bankruptcy, and foreign private issuers that disclose their compensation committee arrangements are excluded from these requirements.

The SEC is directed to issue regulations within 360 days to direct securities exchanges and national securities association to prohibit listing of any equity security that fails to comply with requirements relating to compensation committees and the related rules regarding independence, disclosure and compensation and these regulations are required to provide an opportunity to cure defects.  The SEC is also given the authority to exempt issuers from these provisions, considering the impacts on small issuers. 

                                    9.12.6.3.  Use of Compensation Consultants, Legal Counsel and Advisors.  Compensation Committees may utilize compensation consultants, legal counsel, and advisors only after considering their independence, including other services provided to issuer, fees received from issuer, stock ownership of these individuals and other business and professional relationships between these individuals relating to the issuer.  The compensation committee is responsible for the appointment and oversight of any consultant, legal counsel or advisor that it retains.  The committee is not required to follow advice of the compensation consultant, legal counsel or advisor and their hiring does not affect the duties of the compensation committee.  In any proxy statement filed on or after one year, issuer shall disclose whether compensation committee retained a compensation consultant and whether the work of the consultant raised any conflicts of interests.

The SEC is directed to issue rules that identify factors affecting independence of compensation consultants.  The SEC is also directed to issue disclosure rules relating to retention of and the presence of conflicts of any compensation consultant.

                                    9.12.6.4.  Study Regarding Compensation Consultants.  The SEC is directed to conduct a study on use of compensation consultants and report to Congress within two years.

9.12.7.  Disclosure of Pay versus Performance.  Public companies will be required to include in their executive compensation disclosure proxy and consent material information that shows the relationship between executive compensation paid and the issuer's financial performance, taking into account stock price changes and distributions.  This may include a graphical presentation. [§953]

The SEC shall issue rules to effectuate the pay versus performance disclosure requirements.

9.12.8. Comparing the CEO's compensation to the employees.  Issuers will be required to disclose in any federal securities law filings that require compensation disclosure the (i) the median of the annual total compensation of all employees except the CEO; (ii) the annual total compensation of the CEO; and (iii) the ratio of (A) to (B).

The SEC is directed to issue regulations to require these disclosures for those public company filings that require the disclosure of executive compensation.

9.12.9.  Disclosure of Hedging Arrangements.  Public companies will be required to disclose in their proxy (or consent) solicitations for an annual meeting whether any employee or board member (or a person on their behalf) is permitted to engage in any hedging transaction designed to hedge or offset the value of equity securities granted to the employee or board member as incentive compensation or is otherwise held directly or indirectly by the employee or board member.  Hedging transactions include prepaid variable forward contracts, equity swaps, collars and exchange funds designed to implement the hedging described above.  Note that this disclosure requirement is triggered upon merely being permitted to engage in hedging. [§955]

The SEC is directed to issue regulations to require these hedging disclosures in proxy and consent filings.

9.12.10.  Clawback or Recoupment of Executive Compensation.  If an issuer is required to prepare an accounting restatement due to "material noncompliance of the issuer," the issuer will recover from any current or former executive officer who received incentive-based compensation during the 3 years prior to the date of the restatement, the excess of what would have been paid under the restatement.  This requirement will be enforced through the listing requirements of the national securities exchanges and national securities associations which shall prohibit the listing of any issuer that does not comply with these requirements.  [§954] 

The SEC is directed to issue regulations to direct the securities exchanges and securities associations to impose these "clawback" requirements.

9.12.11. Incentive Compensation by Financial Institutions that is deemed "excessive" or could be deemed to cause risky behavior.

            9.12.11.1.  Disclosure and Reporting Requirements.  "Covered financial institutions" (see below) will be required to disclose to the appropriate Federal regulator the structures of all incentive-based compensation arrangements that provide an executive officer, employee, director or principal shareholder with excessive compensation, fees or benefits, or that could lead to material financial loss to the Covered Financial Institution.  This is not intended to require disclosure of the compensation of individuals.  [§956]

            9.12.11.2.  Substantive Restrictions.  Incentive compensation that regulators determine encourages inappropriate risks by either providing excessive compensation or that could lead to a material loss by the covered financial institution will be prohibited.

                                    9.12.11.3.  Standards.  The compensation requirements must be comparable to those in place under the FDI Act for insured depository institutions

                                    9.12.11.4.  What are "Covered Financial Institutions?"  These are depository institutions, depository institution holding companies, broker-dealers, credit unions, investment advisers, Fannie Mae, Freddie Mac, and any other financial institution that the regulators determine should be covered.  Although applicable to all financial institutions, irrespective of whether they are publicly traded, a covered financial institution must have assets greater than $ 1 billion to be subject to these requirements.

These disclosure and substantive requirements will be implemented through regulations jointly issued by the appropriate Federal regulators within nine months of enactment of the Act.

                       9.12.12.  Restrictions on Voting by Brokers.  Voting by brokers for directors, executive compensation matters, and other significant matters as determined by the SEC will be prohibited, unless the shareholder has instructed his or her broker to vote in accordance with voting instructions.  These provisions are effective immediately but do not apply to uncontested director elections for registered investment companies.  Securities exchanges are permitted to adopt stricter broker voting restrictions not covered by the above.  [§957]

The SEC may adopt rules to restrict broker voting in other significant matters.

                        9.12.13.            Proxy Access.  The SEC has the discretion to require public companies to include shareholder nominees for director.  [§971]

The SEC may adopt rules to permit shareholder access to an issuer's proxy solicitation materials for shareholder nominees to the board. The SEC is permitted to exempt certain issuers or classes of issuers from these requirements and in determining whether to make exemptions, the SEC is directed to consider the burden on small issuers.

                        9.12.14.            Disclosures Regarding Chairman and CEO Structures.  Public companies will be required to disclose in annual proxies the reasons why that issuer has chosen either the same or different persons to serve as chief executive officer and chairman of the board of directors.  [§972]

The SEC is directed to issue disclosure rules to effectuate the CEO/chairman disclosure within 180 days from enactment.