Administration July 16, 2010

Financial Reform Measure Includes Compliance Provisions

July 16, 2010 (PLANSPONSOR.com) – The sweeping financial reform legislation approved by the U.S. Senate on Thursday contains a number of corporate governance provisions, including giving shareholders a non-binding vote on executive pay and golden parachutes. 
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A summary of the Dodd-Frank Wall Street Reform And Consumer Protection Act posted on the Senate Banking Committee’s Web site said the “say on pay” provision “gives shareholders a powerful opportunity to hold accountable executives of the companies they own, and a chance to disapprove where they see the kind of misguided incentive schemes that threatened individual companies and in turn the broader economy.” 

The bill also directs the Securities and Exchange Commission (SEC) to clarify compensation disclosures, including requiring companies to provide charts that compare their executive compensation with stock performance over a five-year period.  

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Further, the bill requires federal financial regulators to issue and enforce joint compensation rules applicable to financial institutions with a Federal regulator.  

The Senate passed the bill 60-39, largely along party lines (three Republicans voted for the measure, one Democrat did not), following House passage last month; the measure now goes to the White House where President Obama has promised to sign it.  

According to the committee summary, other compliance-related provisions in the bill include: 

  • authority given to the SEC to grant shareholders proxy access to nominate directors.  
  • establishment of standards for listing on an exchange to require that compensation committees include only independent directors and have authority to hire compensation consultants to strengthen their independence from the executives. 
  • requirements that public companies set policies to take back executive compensation if it was based on inaccurate financial statements that don’t comply with accounting standards.  

The Banking Committee summary is here.  

A study released in June by Towers Watson found that relatively few U.S. companies are well prepared to put their executive pay programs up to a say-on-pay shareholder vote, although many are taking steps to get ready (see U.S. Companies Preparing for Say-on-Pay Legislation).  

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