The level of specificity in drafting a Compensation Committee Charter can be the subject of debate (well, among those obsessed with compensation and governance like me, anyway). In drafting or updating a Compensation Committee Charter, we generally try to balance two potentially competing objectives. First, we like to list all of the Committee's duties and responsibilities. This is primarily to clarify the allocation of responsibilities among the board and its committees, but also serves as a reminder (or “to do”) for the Committee. However, in listing the Committee's duties and responsibilities, we try to be cautious not to list too many duties or describe them in too much detail. If a Compensation Committee were to fail to perform one of the functions listed in the charter, or fail to perform it according to overly-precise standards set forth in the charter, a court might consider that failure to be evidence of lack of due care.
This issue is fresh again as Committees decide whether to add to their Charters duties and responsibilities relating to the Dodd-Frank Act provisions on executive compensation and governance, and other best practices, including:
- The adjustment or recovery of incentive awards or payments if the performance measures upon which such incentive awards or payments were based are restated or otherwise adjusted in a manner that would reduce the size of an award or payment, consistent with Section 10D of the Exchange Act (per Dodd-Frank Act Section 954).
- The ability of any employee or board member to purchase financial instruments that are designed to hedge or offset any decrease in the market value of equity securities granted by the Company (per Dodd-Frank Act Section 955).
- The ability to review the company's incentive compensation arrangements, considering the company's business objectives and an intention to promote appropriate practices and not excessive risk-taking (per Dodd-Frank Act Section 956 and other SEC requirements).
- The ability to select and obtain the advice of, and terminate, compensation consultants, legal counsel and other advisers (per Dodd-Frank Act Section 952), the requirement that the company provide appropriate funding for the payment of reasonable compensation to these consultants, legal advisers, and other advisers.
Personally, I favor adding provisions like these. However, at a minimum, the Committee and its counsel should discuss the matter.
Under the SEC's executive compensation disclosure rules, a public company must disclose whether or not it has adopted a compensation committee charter, and generally must make available the charter and any amendments to it, on the company's website. The company also must make available a printed copy of the charter to any stockholder who requests it. The NYSE requires its listed companies to adopt a written compensation committee charter that includes provisions specified by the NYSE listing standards. The listing standards require the company to maintain a website on which a printable version of the compensation committee charter is available. NASDAQ listing requirements do not include an explicit requirement that the company even maintain a compensation committee, let alone a written charter. However, in our experience, most NASDAQ-listed companies, following best practices, have both.