Yesterday, as another part of its push for its comprehensive regulatory reform, the Obama Administration delivered to Congress another round of proposed legislation. However, these proposals would have much more widespread impact than the Administration’s previous reform proposals. Yesterday’s proposals, as announced by Treasury, would require annual non-binding shareholder votes on compensation arrangements for directors and senior executive officers of all public companies, as well as impose more stringent independence standards for the compensation committees of all listed companies and require the SEC to promulgate rules regarding the independence of compensation consultants and advisors.
The proposed say-on-pay legislation, which would become effective for any shareholder meeting held after December 15, 2009, would require that public companies hold a non-binding shareholder vote on executive compensation. While say-on-pay is currently required of those companies that have received TARP funds, this proposed legislation would apply to every public company and would require a yes or no vote on total compensation. Additionally, the legislation would require a separate vote for golden parachutes in the case of a merger or acquisition. These golden parachute votes would follow disclosure “in a clear and simple tabular form” by the company of the exact amounts senior executive officers would receive if a merger occurs. In support of the legislation, Treasury cites recent experience with say on pay abroad, specifically the United Kingdom’s Directors’ Remuneration Report Regulations, which require annual non-binding votes by shareholders on executive pay. Also, Treasury noted that while shareholders have increasingly sought to submit shareholder proposals requesting the adoption of say-on-pay votes, many of these requests have either gone unheeded or the implementation of the votes was delayed. Under the proposed legislation the SEC would have one year from the date of enactment to promulgate rules implementing the say-on-pay requirements.
In a separate proposal, Treasury suggested legislation relating to compensation committees. This proposal would implement new independence standards for compensation committees, similar to the independence standards for audit committees under Sarbanes-Oxley. While major stock exchanges have set independence standards for their member’s compensation committees, the proposal argues that these criteria are not stringent enough and that strict standards would both curb abusive practices and ensure shareholder interests are protected. Also, the proposal would grant compensation committees authority and funding independent of a company’s executives. Specifically, it would become a legal requirement that compensation committee be granted authority and resources to engage independent compensation consultants, legal counsel and other advisors that would report only to the committee. Finally, the proposed legislation would require such consultants to meet independence standards to ensure they are independent from management. Under the legislation the SEC would be required to, no later than 270 days after enactment, direct the national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that is not in compliance with the requirements of the proposed legislation.