Dodd-Frank Wall Street
Reform and Consumer
Protection Act
Executive Compensation and
Corporate Governance
Provisions of
the Dodd–Frank Act
(all public companies)
Executive Compensation and
Corporate Governance Reform
• The Dodd-Frank Act provides for the following
reforms:
• Executive Compensation
º Say on Pay
º Recoupment/Clawback Policies
º Compensation Committee Independence
º Additional Compensation Proxy Disclosure
• Corporate Governance
º Mandatory Proxy Access
º Disclosure About Chairman and CEO Positions
º Broker Discretionary Voting
º Disclosure of Any Employee or Director Hedging
• SEC Management Improvements
Say on Pay
• Requires a separate, non-binding shareholder vote to
approve the compensation of the named executive
officers (i.e. “say-on-pay”) at least every 3 years.
• Requires, at least every 6 years, a shareholder vote on
how frequently the non-binding “say-on-pay” vote will
occur (every 1, 2 or 3 years).
• Required for annual meetings held on or after January
22, 2011.
Say on Golden Parachutes
• Any proxy statement seeking approval of a change in
control transaction must include:
• “clear and simple” disclosure of any agreements the acquirer
has with any named executive officers of the subject
company concerning any compensation that relates to the
change in control transaction (“golden parachute” payments);
and
• a separate non-binding shareholder vote to approve such
“golden parachute” agreements, unless the agreements have
already been subject to a vote pursuant to say-on-pay
requirements.
• Required for meetings held on or after January 22, 2011.
Recoupment/Clawbacks
• SEC required to issue rules requiring a company to
recover incentive compensation from certain
executives in the event of an accounting restatement
due to a material non-compliance with financial
reporting requirements.
• Company must recover any amounts in excess of
what would have been paid under the restated
financials.
• Applies to any current or former executive who
received incentive compensation (including stock
options) during the 3-year period preceding the date
the company is required to prepare the restatement.
Compensation Committee
Independence
• SEC required to issue rules within 1 year requiring the
NYSE and NASDAQ to establish independence
standards for all members of the Compensation
Committee.
• In determining independence for this purpose, the
Dodd-Frank Act requires the securities exchanges to
consider certain factors, including:
• the source of compensation for the director (such as any
consulting, advisory or other compensatory fees paid by the
company), and
• whether the director is affiliated with the company, a
subsidiary of the company or an affiliate of a subsidiary of the
company.
Compensation Committee
Independence (cont.)
• The Compensation Committee in its sole discretion may
engage compensation consultants, legal counsel or other
advisers to the Compensation Committee.
• The Compensation Committee must be directly responsible
for the appointment, compensation and oversight of
compensation consultants.
• The Compensation Committee may select compensation
consultants only after considering factors that might affect the
independence of such advisers to be promulgated by the
SEC.
• Company must disclose in its proxy statement if the
Compensation Committee retained a compensation
consultant and any conflict of interest issues.
• This will be required for 2012 proxy season.
Compensation Proxy Disclosure
• Companies must include a discussion of the
relationship between executive compensation
and stock performance.
• Companies must also disclose:
• Median annual total compensation of all employees
(other than the CEO);
• Annual total compensation of the CEO; and
• The ratio of the two amounts.
• Not currently expected to be in effect for 2011
proxy season.
Mandatory Proxy Access
• The Dodd-Frank Act expressly authorizes
the SEC to issue rules granting
shareholders access to company’s proxy
statement to nominate directors.
• Senate provision requiring 5% ownership and
a 2-year holding period was removed from the
final Dodd-Frank Act; SEC to determine
details of access.
• SEC expected to take action soon, for rules to
be in effect for 2011 proxy season.
Chairman and CEO Position
Disclosure
• SEC required to issue rules requiring disclosure in a
company’s proxy statement of its reasons for having
the same person or different individuals serving as
Chairman and CEO.
• Current rules require disclosure of board leadership
structure, including whether Chairman and CEO
positions are combined or separated, and why the
company believes its structure is appropriate.
• SEC required to issue rules by January 17, 2011.
Broker Discretionary Voting
• Directs the NYSE and NASDAQ to prohibit
discretionary voting in connection with the
election of directors, executive
compensation (e.g., “say on pay” and “say
on golden parachute” votes) or any other
significant matter (as determined by SEC).
• Discretionary voting has already been
eliminated from director elections.
Executive Compensation
No Timeframe Provided
SEC Must Implement Rules Requiring the Following
•
•
•
Executive Compensation Disclosures: Two new
executive compensation disclosures: (i) pay for
performance disclosure and (ii) internal pay equity
disclosure.
Clawbacks: Prohibit listing of a company that does not
implement a policy providing (i) for disclosure of the
company’s policy on incentive-based compensation that is
based on financial information and (ii) that the company will
recover from a company’s current or former executive
officers who received incentive-based compensation in the
three-year period preceding a restatement.
Disclosure of Hedging by Insiders: Require companies to
disclose whether employees and directors are allowed to
hedge the value of any equity securities.
Jul. 21, 2010
Nine Months (Apr. 21, 2011)
Incentive-Based Compensation
Requires Federal financial regulators to
jointly prescribe regulations to: (i) require
“covered financial institutions” to report the
structures of all incentive-based
compensation arrangements and (ii) prohibit
incentive-based payment arrangements that
encourage inappropriate risks by providing
employees, directors or principal
shareholders with excessive compensation
or that could lead to material financial loss to
the covered financial institution.
One Year (Jul. 21, 2011)
Independence of Comp. Committees
•
The SEC must issue rules
directing national exchanges to
require listed companies to have
independent compensation
committees within one year after
enactment of DFA.
•
DFA outlines factors to be
considered.
Apr. 21, 2011
Jan. 21, 2011
Jul. 21, 2011
Effective Immediately (Jul. 21, 2010)
Six Months (Jan. 21, 2011)
One Year (Jul. 21, 2011)
Broker Discretionary Voting
Listing exchanges must prohibit broker
discretionary voting in connection with
the election of directors, executive
compensation, or any other significant
matter, as determined by the SEC.
Say on Pay
•
Must provide shareholders with a non-binding
vote on executive compensation at least once
every three years.
•
Must provide shareholders with a non-binding
vote at least once every six years to
determine the frequency of the say on pay
vote.
Retaining Comp. Consultants/Other Advisors
•
General: Compensation committees must have
authority to retain or obtain the advice of an advisor.
•
Independence of Advisors: Compensation
committees must consider factors affecting
independence when retaining an advisor.
•
Disclosure: In any proxy for an annual meeting
occurring more than one year after enactment of the
Act, compensation committees must disclose: (i)
whether a compensation consultant was retained
and (ii) whether the work of the compensation
consultant presented a conflict of interest.
Say on Golden Parachutes
•
Must provide shareholders with a non-binding
vote on named executive officer golden
parachute arrangements where shareholders
are asked to approve an M&A transaction.
Disclosure of Employee and
Director Hedging
• The SEC must issue a rule requiring
companies to disclose whether their
employees or directors are permitted to
purchase financial instruments designed to
hedge against any decreases in the
market value of the company’s stock.
• The Dodd-Frank Act is silent as to when
this will be required.
Implementation Timelines and
Further Actions
Changes to SEC Management
• SEC required to submit annual report and certification
that assess the effectiveness of the SEC’s internal
supervisory controls and its procedures used to perform
examinations, investigations and reviews of filings.
• U.S. Comptroller General is required to submit:
• A triennial report evaluating SEC personnel management;
• An annual report assessing the SEC’s internal control structure
and procedures for financial reporting; and
• A triennial report on the SEC’s oversight of FINRA.
• SEC Divisions of Trading and Markets and Investment
Management provided with staff of examiners to perform
compliance inspections and examinations.
Changes to SEC Management (cont.)
• SEC Inspector General required to establish hotline for
SEC employee confidential suggestions regarding
waste, misconduct or mismanagement.
• SEC required to employ a consultant to review the
internal operations, structure, funding and need for
comprehensive reform of the SEC and its relationship
with self-regulatory organizations.
• U.S. Comptroller General required to perform study on
the turnover of Staff that work for financial institutions
regulated by the SEC and determine whether postemployment restrictions are necessary.