- Advisory vote on executive pay.
- Proxy access for shareholders to nominate directors.
- Majority vote in uncontested elections (even though this was not included in the final bill, more companies are voluntarily adopting this at the behest of shareholders and activists).
- Disclosure of chair and CEO structure.
- Establish standards calling for independent compensation consultants.
- Establish clawback language for executive compensation based on inaccurate financial statements.
With that said, I have pored over much of the “electronic literature” that has been produced over the past month regarding financial reform (particularly client memos). I have found five that stand out for their clarity and insightful analysis. They are:
- An Overview of The Dodd-Frank Wall Street Reform and Consumer Protection Act, Weil Gotshal & Manges LLP, 26 pages, July 13, 2010. Weil formed a Financial Regulatory Reform Working Group whose job it is to “marshal expertise and skill across legal disciplines” to respond to clients’ needs. The overview is broken down into eight sections (systemic risk, banking industry, derivatives, hedge funds and private equity, securities regulation, insurance industry, consumer and investor protection and corporate governance and executive compensation). That last section focuses on the areas the firm believes represent the most significant changes: proxy access authority, Say on Pay, broker discretionary voting (which goes further than the new rule eliminating such voting on share compensation plans), compensation committee and adviser independence, disclosure of board leadership, clawback of incentive compensation, hedging by employees and directors, and compensation structures of financial institutions.
- Corporate Governance and Executive Compensation Provisions of the Dodd-Frank Act, Paul, Weiss, Rifkind, Wharton & Garrison LLP, 4 pages, July 8, 2010. In this concise memo that was posted on The Harvard Law School Forum on Corporate Governance and Financial Regulation, the firm spells out the myriad of reforms in the corporate governance and executive compensation areas. Under corporate governance, it includes descriptions of proxy access, majority voting (the fact that it was omitted from the final bill), chair and CEO disclosures, broker discretionary voting, the need for risk committees at certain non-bank financial companies and the smaller public company exemption from Sarbanes-Oxley internal control requirements. Under executive compensation, it includes descriptions of Say on Pay, Say on Golden Parachutes, disclosure of Say on Pay and Say on Golden Parachutes votes by institutional investors, and compensation committee independence. What is really helpful in this memo are the two charts at the end. There is one for the corporate governance measures and another for the executive compensation statutes. Each chart includes the measure, the action required and the deadline for it to take effect. (To get a more in-depth view of the firm’s viewpoints on financial reform, watch partner David S. Huntington as he spoke with TK Kerstetter of Corporate Board Member on their Web-only This Week in the Board Room.)
- The Dodd-Frank Act: Significant Impact on Public Companies, Skadden, Arps, Slate, Meagher & Flom LLP, 11 pages, July 21, 2010. This memo wasn’t released until the bill was signed by President Obama this week. It focuses on investor protection and securities enforcement, corporate governance and executive compensation, derivatives, credit rating agencies, securitization and other securities law reforms. It also refers to another Skadden Arps publication, The Dodd-Frank Act: Commentary and Insights. Under investor protection, it describes in detail how the SEC Whistleblower Bounty Program created under the legislation works. It notes that its effect is immediate and that it pays off even if information received is about an alleged violation that predates the law. One important statement made by Skadden Arps is that the firm believes the SEC will adopt proxy access rules in the coming weeks.
- Investor Protection Provisions of the Dodd-Frank Act, K&L Gates LLP, 5 pages, July 11, 2010. This memo, which was posted on The Harvard Law School Forum on Corporate Governance and Financial Regulation, looks at the shareholder protection provisions of the law. It analyzes those sections on whistleblowers, expanded secondary liability, jurisdiction over foreign securities transactions, fiduciary standard for brokers, the SEC authority to restrict customer arbitration agreements, and nationwide SEC trial subpoenas. The memo also points out that the legislation will give the SEC the funds necessary to double its budget as well as make many operational improvements.
- Regulatory Reform in the United States – New Rules, Many Questions, FS Insights, Protiviti, 4 pages, July 20, 2010. This financial services newsletter produced by the risk and business consulting (and internal audit) firm Protiviti asks some very pointed questions, attempts to answer some of them and gives its opinion on whether or not financial services reform makes regulation better. This short article asks the following questions: Does the reform legislation accomplish what the Obama administration had hoped? How did the financial services industry fare at the end of the debate? Are financial services industry customers better off because of the legislation? Who’s going to pay for all of this? Will the Dodd-Frank Act prevent the next crisis? The memo also points out that in addition to the many new rules coming from such regulators as the SEC and the Federal Reserve, the Financial Crisis Inquiry Commission will issue a report in December that will likely recommend additional changes.
By now, you’ve probably been deluged with alerts, client memos, invitations to webinars and live conferences in the past week all centered on the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act.
If you are a director, C-level executive, corporate secretary or anyone for that matter involved in the corporate governance area, you are most likely asking the question, “How will this affect my company?” Unfortunately, the answer is not so easy. Based on watching hours of testimony, listening to several conference panels and reading reams of blog posts and articles on the topic, I can tell you the spirit of the law is to make corporate governance more transparent, less complex and include more dialogue with shareholders.
Dialogue will be the key word for public companies over the next year as the SEC will issue new rules and guidance related to the enactment of the financial reform act. Most likely it will start late this summer when the regulator issues the first of possibly 50 or 60 new rules over the next six months for public comment. One common theme throughout most of the client memos and alerts that I have seen is that companies should become active in the public comment periods (normally 90 days for each rule). It may be the last opportunity to be heard on financial reform.
Over the next two months, I plan on writing a series of posts on six major issues brought up by the financial reform legislation that affect corporate governance. I will complement those posts with Q&A’s with experts and Worth Reading compilations. By the way, those issues are: