(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)
As public companies prepare for their first proxy season under the Dodd Frank Wall Street Reform and Consumer Protection Act, I’m fielding many questions about implementation of the compensation and governance provisions of the Act. Unfortunately, given the broad language of the Act and the current absence of SEC regulations, there are not a lot of definitive answers.
However, the Society of Corporate Secretaries and Governance Professionals has provided a very thoughtful and helpful analysis. Darla C. Stuckey, Senior Vice President of the Society, in her testimony before the House Finance Committee last week, discussed the possible impact of various compensation-related provisions of the Act, as well as the Society’s “wish list” of possible regulatory clarifications. Ms. Stuckey’s testimony makes interesting reading for anyone wrestling with preparation for the 2011 proxy season:
Say-on-Pay and Related Votes. The Society observes that the SEC is targeting January through March of 2011 for adoption of rules on Say-on-Pay and Say When on Pay. Since these votes are required at the first shareholders meeting on or after January 21, 2011, even January is too late to provide guidance for many affected companies. The Society requests that the SEC propose the rules in early October so the final rules can at least be adopted before January 21.
Advisory Firms. The Society also commented that the SEC should consider the power of proxy advisory firms (which would include ISS) in the Say-on-Pay process. A recent survey indicated that almost half of Society members reported 30% or more of the companies’ shares being voted in line with the advisory firms’ recommendations. Over 60% of respondents indicated at least one experience with an advisory firm’s recommendations being based on materially inaccurate or incomplete information, and of those recommendations, 60% were not corrected.
Comment. I have listened to several public company representatives complain about advisory firm recommendations based on inaccurate or incomplete information. Unfortunately, with the increased workload of the advisory firms in the coming year, this problem is not likely to get better.
Say When on Pay. The Society recommends that the SEC rulemaking should give weight to board recommendations on the frequency of Say-on-Pay votes. They suggest providing boards “a choice whether to offer a resolution with a single recommended choice (e.g., every two years), or a resolution that would give the board’s preference but ask for a vote on a one, two or three year frequency in a multiple-choice fashion.” The latter type of vote would involve a plurality vote of the shareholders.
Comment. The Society is asking the SEC to allow companies the discretion to offer When on Pay as a yes-or-no vote on a single recommended choice (e.g., an up or down vote on a triennial Say-on-Pay vote). I don’t believe it is clear that such a vote would be consistent with Section 951(a)(2) of the Act, which requires a separate resolution “to determine whether votes on the . . . [Say-on-Pay resolutions] will occur every 1, 2 or 3 years.” Ms. Stuckey included with her testimony a comment letter on the Act to the SEC from the Center on Executive Compensation. That letter does make a cogent argument that the vote with a single recommended choice is consistent with the Act, but certainly doesn’t answer all questions about the SEC’s authority in this area. Ultimately, the SEC has to make a determination about its authority to permit a “single recommended choice” vote – and quickly, if it is to propose rules by early October, as requested by the Society.
If the SEC rules do allow an up or down vote on a single recommended choice, the rules will have to answer other questions. For example, if the shareholders vote against a triennial Say-on-Pay vote, what action will the board of a company be required to take in subsequent years – would the company then be required to hold annual Say-on-Pay votes, or could the board elect to hold biennial votes?
Internal Pay Ratio. The Act will require companies to present the median annual total compensation of all employees of the company (other than the CEO) and the annual total compensation of the CEO, then provide the ratio of these figures. These rules are expected to be in effect for the 2012 proxy season. Ms. Stuckey’s testimony makes it clear just how difficult and complex a task will be presented by the calculations. The Society recommends that the Act be clarified, either through a technical amendment or rulemaking, to provide that “all employees” be limited to full time U.S. employees, and that the total compensation amount exclude pension accruals, benefits and other non-cash items. According to an Alert from the Society dated September 28, 2010, Congressman Frank indicated his agreement with Ms. Stuckey on this issue.
The Society also commented on the Act’s clawback requirement, a subject I will address in a future post.
Legal Challenge Seeks to Invalidate the Proxy Access Rule
The U.S. Chamber of Commerce yesterday announced that the Chamber and the Business Roundtable filed a petition with the U.S. Court of Appeals challenging the SEC’s adoption of Rule 14a-11, the proxy access rule. This rule grants large shareholders the right to nominate directors in certain circumstances and have these nominees included in the company’s proxy statement. The petition claims, among other things, that the Rule is arbitrary and capricious and that the SEC failed to follow appropriate procedures. It’s not clear whether the petition will affect the Rule’s scheduled effective date of November 15, 2010.