Category Corporate Governance

NASPP Chicago 8/3 Presentation on Dodd-Frank Act

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Yesterday I presented The Winds of Change Blow Once Again at the National Association of Stock Plan Professionals’ Chicago Chapter meeting.  It was a good group and the audience participated which always makes these things a bit more interesting.  in any event, here’s the presentation I used for the occasion to detail the executive compensation and corporate governance changes wrought bythe  Dodd-Frank Act as we understand them today, along with some potential action items for folks as well.

Dan Walter of Performensation and I will be conducting a webcast next week (8/11) on the Dodd-Frank Act, titled What Compensation Professionals Need to Know About Financial Reform Legislation. We’ll discuss the action items folks should be considering and focusing on right now.  Here’s a link to the details for the webcast:

http://www.salesavatar.com/hcrss/2010-08-webinar.html

Additional Provisions of the Dodd-Frank Act

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In addition to the executive compensation provisions in the Dodd-Frank Act, there are a few corporate governance and miscellaneous provisions worth noting.

Corporate Governance:

Section 971. Proxy Access—SEC may include rules requiring issuers to include shareholder nominees for director elections and follow a certain procedure in relation to a solicitation of a proxy.

Section 972. Disclosures Regarding Chairman and CEO—SEC shall issue rules within 180 days after enactment of Dodd-Frank Act that will require companies to disclose in their annual proxies why the company has chosen:

  1. The same person to serve as chairman of the board and CEO (or in equivalent positions); or
  2. Different individuals to serve as chairman of the board and CEO (or equivalent positions).

Miscellaneous

Section 1503. Reporting Requirements Regarding Coal or Other Mine Safety—Requires companies that operate a coal or other mine to include in their periodic report with the SEC (Annual Report and Form 10-Qs) specified safety information about each mine, including total number of violations of mandatory health or safety standards.

Section 1504. Disclosure of Payment By Resource Extraction Issuers—requires “resource extraction issuers” to include in their annual reports information relating to any payment made by the company, a subsidiary or a company under control of company, to a foreign government or the Federal government for the purpose of the commercial development of oil, natural gas, or minerals, specifying the amount and type of such payments for each project and the type and total of such payments made to each government.

Dodd-Frank Act’s Executive Compensation Provisions

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I put together a short presentation that outlines the executive compensation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (below).

Generally, the executive compensation provisions apply to all public companies. However, there is at least one that only applies to covered financial institutions (the one subjecting such companies to enhanced compensation structure reporting and prohibitions).

Having discussed these provisions with a few folks at the Equilar ExecutiveCompensation Summit earlier this month, here are the provisions that will likely be the most burdensome for companies:

  • The requirement to disclose median total annual compensation for all employees (other than the CEO)—total compensation is defined as in the proxy disclosure rules for purposes of the Summary Compensation Table. So, in effect, companies will need to fill out a summary compensation table (or at least determine the amounts that would be disclosed in that table) for every employee! Needless to say, this will be a massive undertaking and cost companies quite a bit to assemble.
  • Developing and implementing a clawback policy—there are many open questions left by Dodd-Frank, so we’ll have to wait to see how the SEC fills things in.  But as it stands now, drafting a clawback policy will be a bit of a challenge given the language of the Act, for example, how would the Act’s language apply to stock options? You couldn’t really be able to determine what the stock price would have been absent the restatement triggering the clawback, so what happens?
  • Say on pay coupled with elimination of broker votes—could mean the first year of mandatory say on pay for all companies becomes a bit of a nail biter while everyone tries to figure out how things will work and how to ensure a sufficient favorable vote on companies’ compensation disclosed in the proxy.
  • For covered institutions, they’ll have to wait a bit longer to see how the appropriate Federal regulators come down on compensation structures.  Given the report of the Federal Reserve on large, complex banking organizations, I think it is safe to assume that these organizations’ compensation designs will be transformed once again.

Effective dates for the provisions are all over the map from immediately effective upon enactment, to having a delay of 6-, 9- or 12-months after enactment. It sounds like the House and Senate have ironed out their differences on this Act and the President is expected to sign it as soon as both houses of Congress pass it, which is expected to occur as soon as July 4th. So some of these provisions (most notably say on pay) most likely will be effective for the 2011 proxy season.

I hope you find the presentation helpful.  If you have any questions or would like to discuss implications, just let me know.