Though the primary focus of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) is the reduction of systemic risk in financial markets and increased regulation of large financial institutions, Dodd-Frank also contains executive compensation, corporate governance and enforcement provisions applicable to most public companies. Some of these provisions are highlighted below.
- Non-Binding “Say-on-Pay” Shareholder Vote on Executive Compensation - Section 951 of Dodd-Frank mandates “say-on-pay” by adding a requirement to the Exchange Act that shareholders receive the opportunity to vote on a non-binding resolution on the compensation of named executive officers at least once every three years, to be included in a proxy statement for an annual or other meeting of shareholders for which the SEC’s proxy solicitation rules require compensation disclosure.
- Non-Binding “Say-on-Pay” Shareholder Vote on Executive Compensation Relating to Business Combinations (“Golden Parachutes”) - Section 951 of Dodd-Frank requires that any proxy solicitation materials for a meeting at which shareholders are asked to approve a business combination or disposition of substantially all of a company’s assets must meet certain criteria.
- Independent Compensation Committee Requirement - Section 952 of Dodd-Frank requires the SEC to issue rules requiring national securities exchanges to prohibit the listing of any equity security of a company if its board of directors does not have an “independent” compensation committee. Section 952 also requires the SEC to issue rules directing national securities exchanges to adopt listing standards containing explicit authority for compensation committees to engage their own independent advisors.
- Pay for Performance Disclosure - Section 953 of Dodd-Frank directs the SEC to adopt rules that require companies to provide in any proxy statement for an annual meeting disclosure that shows the relationship between executive compensation actually paid by the company and the company’s financial performance, which disclosure may be included in a graphic representation.
- Internal Pay Ratio Disclosure - Section 953 also directs the SEC to adopt rules that require disclosure of (i) the median total annual compensation of all employees of the company other than the CEO; (ii) the total annual compensation of the company’s CEO; and (iii) the ratio of the two amounts.
- Incentive Compensation Clawbacks - Section 954 of Dodd-Frank directs the SEC to require national securities exchanges to adopt listing standards so that listed companies must develop and implement policies to “claw back” executive compensation in the event of a financial restatement.