Corporate Governance: Executive Compensation and the Rest of the Changing Landscape Gary C. Ivey...
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Transcript of Corporate Governance: Executive Compensation and the Rest of the Changing Landscape Gary C. Ivey...
Corporate Governance: Executive Compensation and the Rest of the
Changing Landscape
Gary C. Ivey
Alston & Bird LLP
September 2, 2009
Corporate Governance
How should companies organize themselves? Who are the decision-makers? What is the relationship among stockholders, boards and management teams?
These questions have traditionally been the domain of state corporation laws and, for listed companies, the stock exchanges (NYSE, Nasdaq, etc.)
Now, however, more than ever, corporate boards and management teams must also consider the impact on corporate governance of oversight and regulation by Congress, the SEC and even the IRS, as well as the efforts and growing influence of proxy firms and stockholder activist groups
Troubling Developments in the Market
Scandals of early 2000’s – Enron, WorldCom and others More recently, issues such as the advantageous dating of stock
options Growing concern over executive compensation levels,
particularly where company performance did not support the compensation paid
Responding to Market Concerns In 2002, Sarbanes-Oxley and related regulation and exchange
rulemaking, including Prohibitions of loans to directors and officers Forfeiture of bonuses and stock gains by CEOs and CFOs in event of restatements
of financials as a result of misconduct New audit committee independence requirements and responsibilities New whistleblower regulations New financial statement certification requirements New requirements for assessing and reporting on company’s internal controls Expanded use of current reporting on Form 8-K Creation of Public Company Accounting Oversight Board (PCAOB)
Responding to Market Concerns (cont’d)
Increased disclosure requirements in areas of executive compensation, board independence, etc.
Increased proxy firm and shareholder activism Majority voting for directors Push to eliminate defensive devices, such as staggered boards, rights plans,
etc. Increased shareholder access to a company’s proxy and proxy statement Recommended withhold votes for directors in certain cases
Increased shareholder litigation Closer scrutiny by the IRS
Accelerated Pace of Change
Then in 2007, 2008 and 2009 Financial meltdown Actual and potential bank failures Bailouts Recession More scandal
A new Administration and more aggressive Congress with a proactive view of the role of government in addressing these issues
Accelerated Pace of Change(cont’d)
In June, Treasury announced “interim final regulations” – the so-called TARP restrictions, setting out compensation and governance restrictions applicable to TARP recipients: Prohibition on bonuses, retention awards and incentive compensation Prohibition on severance payments Prohibition on compensation that encourages “unnecessary and excessive
risks” or manipulation of earnings Clawbacks Enhanced disclosure of the use and role of compensation consultants Independent compensation committee to conduct semi-annual risk
assessment Say-on-pay vote
NYSE Action to Eliminate Broker Voting in Director Elections
The SEC recently approved a proposed amendment to NYSE Rule 452 to eliminate broker discretionary voting in the election of directors, regardless of whether the election is contested
Amended Rule 452 applies to stockholder meetings (not just for NYSE-listed companies) held on or after January 1, 2010
SEC Proposal to Give Proxy Access to Stockholders for Director Nominations
Would require a public company to include in its proxy materials nominees for election to the board of directors submitted by one or more stockholders
Company would have to include in its proxy statement no more than one stockholder nominee or the number that represents 25% of the company’s board of directors, whichever is greater
SEC Proposal to Give Proxy Access to Stockholders for Director Nominations (cont’d)
Includes stockholder eligibility requirements based on level and duration of ownership Stockholder must beneficially own at least:
1% of the voting securities of a “large accelerated filer” 3% of voting securities of an “accelerated filer” 5% of voting securities of a non-accelerated filer
Stockholder must have held such voting securities for at least one year
Public Comment Process for Proxy Access Proposal
SEC seeking comment on proposal About 170 separate questions posed to commenters
Covering the basic access requirements, additional disclosure and reporting obligations by the nominating stockholder, phase-in requirements and other factors
Several hundred comment letters filed to date Alston & Bird’s letter
State law issues Eligibility thresholds “First In” model for nominees Disclosure and filing requirements for nominating stockholders Phase-in
SEC Proposal to Change Compensation Disclosure Rules
Proposed amendments to expand the Compensation Discussion and Analysis (CD&A) section of the proxy statement, requiring a company to discuss: The relationship between company’s overall compensation policies, including
risk-taking incentives, for employees generally (not just executive officers) The company’s risk profile and management of risk, in situations where such risks
would have a material effect on the company
Would also require companies to disclose fees paid to compensation consultants (or their affiliates) who play a role in determining the amount and form of compensation for executives and directors if they also provide other non-compensation-related services to the company
SEC Proposal to Require More Corporate Governance Disclosures
Additional amendments (in same rulemaking) would require companies to disclose in their proxy statement the particular experience, qualification, attributes or skills that qualify an individual to serve as director or member of any board committee
Would also require a company to disclose its leadership structure, including whether the same person serves as both CEO and chairman of the board, and why it believes its particular structure is the most appropriate one for the company
Would require disclosure of the extent of board’s role in the company’s risk management
SEC Proposal to Expedite Disclosure of Voting Results
The same proposal would also add a new Form 8-K requirement for companies to disclose the results of a stockholder vote within four business days after the end of the meeting at which the vote was held (in contested elections, the final results would be permitted to be delayed under certain circumstances) Currently, election results are required to be disclosed in the next quarterly
report on Form 10-Q
Obama Administration Proposes Say-on-Pay Requirements
Treasury recently proposed legislation that would require public companies to hold a non-binding yes or no vote on: Senior executives’ total compensation packages at each annual meeting
after December 15, 2009 Golden parachutes in the case of a merger or acquisition, accompanied by
disclosure “in a clear and simple tabular form” of the exact amounts senior executive officers would receive if a merger occurs
Under the proposed legislation, the SEC would have one year from the date of enactment to promulgate rules implementing the say-on-pay requirements
Administration Also Proposes New Independence Requirements for Compensation Committees
Treasury has also recently proposed legislation relating to public company compensation committees Would implement new independence standards for compensation
committees Similar to the independence standards for audit committees under
Sarbanes-Oxley
Congressional Action on Corporate Governance Reform
A number of different legislative initiatives regarding corporate governance reforms have been proposed in both chambers of Congress
In particular, Senator Schumer (NY) has proposed legislation, the Shareholder Bill of Rights Act of 2009, which would include: An annual advisory vote by shareholders on executive compensation An advisory vote by shareholders on golden parachutes Separating the duties of the Chairman and CEO Confirmation of the authority of the SEC to give shareholder access to annual proxy
statements for director nominations A requirement that public companies create a risk oversight committee An annual majority vote on directors (except in contested elections) Elimination of staggered boards
Congressional Action on Corporate Governance Reform (cont’d)
Additionally, the “Corporate and Financial Institution Compensation Fairness Act of 2009,” introduced in the House of Representatives (by Congressman Frank and others): Would give shareholders a “say-on-pay” for top executives -- ensure that
they would have a non-binding, advisory vote on company’s pay practices (annual compensation and golden parachutes, similar to Schumer bill in Senate)
Establish additional independence standards for compensation committees Establish independence standards for advisors to compensation committees
and limit the forms of compensation payable to consultants Prescribe rules for “covered financial institutions” for the disclosure of the
relationship between executive compensation and the institution’s risk management and prohibit a compensation structure that “the regulators determine encourages inappropriate risks….”
Where Are We Headed? What to Look Out For Pending SEC rulemakings will likely be implemented in some form
for the upcoming proxy season The details and nuances are up for grabs, but proxy access for director
nominations and increased disclosures regarding executive compensation (as related to a company’s risk profile, etc.) and director qualifications and independence are likely to be effective in 2010
Pending legislation is less certain A full plate in Congress and for the Administration with health care reform, etc. Even if adopted in something close to current form, legislation contemplates a
time period for action by the SEC or the exchanges and phase-in after that Unlikely to impact 2010 proxy season, but very possible for 2011
Where Are We Headed? What to Look Out For (cont’d)
Non-binding, advisory votes What effect?
Director elections generally Majority voting Elimination of broker voting Withhold recommendations
Cautionary Note: Change-in-control provisions Common in credit facilities, indentures and a variety of other financial and
commercial contracts Maintaining a majority of “continuing directors” may not be as easy as once
thought