Department of the Treasury Proposes Executive Compensation Reform
July 22, 2009
On July 16, 2009, the U.S. Department of the Treasury (the Treasury) submitted to Congress, as part of the Investor Protection Act of 2009, two executive compensation-related legislative proposals that address the following key areas: say-on-pay and compensation committee independence. As described by the Treasury, the proposals are intended to further the steps taken by the Obama administration in recent weeks to broadly reform financial regulation in response to the current financial crisis.
Although it is too early in the legislative process to determine whether the proposals will pass, congressional response to the proposed legislation has been swift. Earlier this week, U.S. Representative Barney Frank, chair of the House of Representatives Financial Services Committee, circulated a modified version of the Treasury's proposals, termed the "Corporate and Financial Institution Compensation Fairness Act of 2009" (which included enhanced disclosure and reporting obligations with respect to incentive compensation arrangements at financial institutions).
Wilson Sonsini Goodrich & Rosati will provide more information regarding these matters as legislation is made public and considered.
The say-on-pay proposal is similar to one that was co-sponsored by then-Senator Obama in 2007 and follows other say-on-pay proposals recently introduced by U.S. Representative Gary Peters (Shareholder Empowerment Act of 2009, summarized in this WSGR Alert) and U.S. Senator Charles Schumer (Shareholder Bill of Rights Act of 2009, summarized in this WSGR Alert). The Treasury's proposal is intended to better align executive pay with shareholder interests and discourage excessive risk-taking by requiring that certain executive compensation-related matters be submitted to non-binding votes of company shareholders. Although the vote would be non-binding, the Treasury believes that the prospect of a vote on executive compensation will influence companies to tighten the relationship between pay and performance and will enhance corporate value.
If approved, the specific say-on-pay requirements will be implemented through rules to be established by the Securities and Exchange Commission, but the new requirements will include the following:
- A separate annual non-binding shareholder vote on all executive compensation disclosed in the annual proxy statement. This will include all arrangements disclosed in the CD&A (compensation discussion and analysis), the compensation committee report, the compensation tables, and all related materials.
- A separate non-binding shareholder vote on "golden parachute" arrangements for any meeting involving merger and acquisition transactions, or a sale of the assets of the company. In anticipation of the vote, companies will be required to disclose these arrangements in simple, clear tabular format and disclose all payments that the executive officers may receive in connection with the M&A transaction.
The proposals state clearly that the results of the shareholder vote will not be binding on a company or its board of directors and such results may also not be construed as overruling a previous decision of the board (e.g., an employment agreement), nor to create or imply any additional fiduciary duty owed by the board to company shareholders.
If approved, the requirements described above would apply to annual shareholder meetings or shareholder meetings relating to M&A transactions, as applicable, held on or after December 15, 2009.
Compensation Committee Independence
In the wake of the current financial crisis, greater attention is being paid to the independence of the parties responsible for negotiating and/or evaluating executive compensation arrangements, namely compensation committees, compensation consultants, and other advisers. The second legislative proposal is intended to address these concerns by imposing the following independence requirements:
- Members of the compensation committee will be required to satisfy new standards for independence similar to the rules established by the Sarbanes-Oxley Act of 2002 for members of the audit committee. These standards will preclude compensation committee members from accepting any consulting, advisory, or other compensatory fee from the company or from being affiliated persons of the company (or any subsidiary of the company), other than in their capacity as members of the compensation committee, the company's board of directors, or any other board committee.
- Compensation consultants, legal counsel, and other advisers to the compensation committees will be required to satisfy independence standards to be established by the Securities and Exchange Commission.
- Compensation committees will have the authority and funding to retain independent compensation consultants, legal counsel, and other advisers. Companies also will be required to disclose in their annual proxies whether independent compensation consultants were retained by the compensation committee and, if not, the basis for the compensation committee's decision not to retain such an independent consultant.
If approved, the Securities and Exchange Commission will be required to adopt (1) regulations that will determine the appropriate independence standard to apply under the new rules and (2) rules directing the national securities exchanges and national securities associations to prohibit the listing of securities of companies that do not comply with the new independence standards.
For More Information
If you have any questions regarding this WSGR Alert, please contact any member of Wilson Sonsini Goodrich & Rosati's employee benefits and compensation practice:
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