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Dodd-Frank Act Changes to Executive Compensation and Corporate Governance

Beyond the straight-forward self-executing provisions of the Dodd-Frank Act, like the amendments to the definition of accredited investor or the exemption of non-accelerated filers from SOX Section 404(b), there are several other provisions effecting non-financial institutions that will require additional regulatory rulemaking. Included among these are the following sections effecting executive compensation and corporate governance:

Enhanced Voting Requirements

Executive Compensation (Sec. 951)

Beginning with the first annual or other shareholder meeting taking place on or after January 21, 2011, and at least once every three years thereafter, a company will have to provide its shareholders with an opportunity to vote to approve the compensation of those executive officers for whom it is required to make compensation discloses pursuant to the Securities and Exchange Commission’s proxy rules.  At least once every six years, a company will also have to provide its shareholders with an opportunity to determine whether the vote to approve executive compensation should take place every year, every other year or every three years.  Any shareholder vote to approve executive compensation is non-binding.

Golden Parachutes (Sec. 951)

For any proxy or consent solicitation for a shareholder meeting taking place on or after January 21, 2011, in which shareholders are asked to vote to approve a merger, acquisition or similar transaction, the shareholders must also be provided with an opportunity to vote to approve any agreements or understandings regarding compensation that may be paid to a named executive officer in relation to the transaction.  Any shareholder vote to approve golden parachute compensation is also non-binding.

Possible Exemptions (Sec. 951)

The Dodd-Frank Act also provides that the Commission may exempt a company or entire class of companies from these non-binding shareholder approval requirements, taking into consideration whether smaller issuers are disproportionately burdened by the requirements.

Enhanced Disclosure Requirements

Pay Versus Performance (Sec. 953)

The Commission will be adopting rules requiring a company to disclose the relationship between its executives’ compensation and  its financial performance.

Internal Pay Equity (Sec. 953)

The Commission will be adopting rules requiring a company to disclose the median annual compensation of all employees, except for the chief executive officer, the total annual compensation of the chief executive officer and the ratio of the median annual compensation of all employees to the total annual compensation of the chief executive officer.

Hedging by Employees and Directors (Sec. 955)

The Commission will be adopting rules requiring a company to disclose whether any of its employees or directors are permitted to purchase hedging instruments to offset the value of securities they hold or that have been granted to them as compensation.

Chairman and CEO Structures (Sec. 972)

By January 17, 2011 the Commission will be adopting rules requiring a company to disclose why it has chosen either the same person or two different people to serve as chairman of the board of directors and chief executive officer.

Compensation Committees (Sec. 952)

For any proxy or consent solicitation for a shareholder meeting taking place on or after July 16, 2011, a company will have to disclose whether its compensation committee retained a compensation consultant, whether the consultant’s work raised any conflict of interest, and, if so, the nature of the conflict and how it is being addressed.

Enhanced Listing Requirements

Compensation Committees (Sec. 952)

By July 16, 2011 the Commission will be adopting rules directing national securities exchanges and associations to prohibit the listing of a company that does not maintain an independent compensation committee with sole discretion in selecting compensation consultants, independent legal counsel and other advisors.  The rules will provide for a reasonable cure period, may allow for the exemption of certain categories of companies, taking into consideration their potential impact on smaller issuers, and will not apply to certain foreign private issuers, controlled companies or limited partnerships, among other entities.

Compensation Clawbacks (Sec. 954)

The Commission will be adopting rules directing national securities exchanges and associations to prohibit the listing of a company that does not implement a policy for:

  • disclosing incentive-based compensation that is based on reported financial information; and
  • recovering such compensation following a restatement based on material noncompliance with financial reporting requirements.

The policy must cover any current or former executive officer who receives incentive-based compensation during the 3 year period preceding a restatement and the amount of compensation recovered must be the excess of what was paid, including stock options, over what would have been paid based on the restatements.

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