In July, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law in the United States. Although primarily aimed at financial regulatory reforms, the Dodd-Frank Act includes a number of corporate governance and employment-related provisions that may be of interest to human resource professionals.
The Dodd-Frank Act, and the regulations to be adopted under it, will generally apply to companies that are subject to the reporting requirements of the U.S. Securities and Exchange Commission (the “SEC”), including, to a limited extent, Canadian public companies that are designated as “foreign private issuers” under U.S. federal securities laws. Notwithstanding the expected limited application of the Dodd-Frank Act to Canadian companies, U.S. rules often influence future Canadian legal requirements and Canadian “best practices”, so employers in Canada may be able to glean some indication of where we are heading north of the 49th parallel.
Many of the Dodd-Frank Act provisions are to be “fleshed out” by specific rules that will be developed by the SEC. In September, 2010, the SEC published a timetable for its rule-making process. As noted below, the schedule extends well into 2011, but once those rules are proposed by the SEC, more details on the requirements will become clear.
The employment-related matters contained in the Dodd-Frank Act include the following:
- “Say-on-pay” shareholder votes will become mandatory, providing a non-binding vote on a company’s executive compensation at least once every three years (next action on the SEC’s timetable is scheduled for January-March 2011)
- “Say-on-golden parachutes” will be implemented, providing for a non-binding shareholder vote on golden parachutes described in proxy statements relating to a business combination transaction or a sale of all or substantially all of a company’s assets (January-March 2011).
- “Pay versus performance” and “internal pay equity” disclosure will be required. “Pay versus performance” refers to the relationship between executive compensation paid and a company’s financial performance, while “internal pay equity” refers to the ratio between the median total compensation for all employees worldwide to the CEO’s total compensation (April-July 2011).
- Compensation committees of the boards of directors of stock exchange listed companies will need to be composed entirely of independent directors, according to certain standards and definitions to be developed (November-December 2010).
- Compensation consultants and advisors who advise a company’s board of directors on executive compensation and related matters may need to be independent, as determined by a company’s compensation committee in accordance with new rules to be developed by the SEC (November-December 2010).
- “Clawback policies” will need to be developed and publicly disclosed, outlining the principles under which a company’s executives will be required to disgorge certain incentive-based compensation paid during the three year period preceding an accounting restatement (April-July 2011).
- “Hedging disclosure” will need to be made with respect to the value of the company’s equity securities held by directors and employees that have or may be hedged, or policies may be required to prohibit such hedging (April-July 2011).