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Corporate Governance and the SEC: The Impact of the Stimulus Bill (Part 3)

By J. Robert Brown

We are examining the changing role of the SEC in the corporate governance process and the recent changes included in the Stimulus Bill.

In addition to the restrictions on executive compensation, the amendments to TARP contained in the stimulus bill also required say on pay and required a certification by the CEO and CFO concerning compliance with the executive compensation provisions.  Both of the requirements were given to the SEC to enforce.  In addition, however, the Act builds in one very large but little noticed area for SEC involvement. We will discuss these in turn.

The provisions that are to be overseen by the Commission include the requirement of a certification of compliance.  Reminiscent of the certification requirement inserted into SOX (see section 302 of SOX and Rule 13a-14), the provision requires the CEO and CFO to provide a "written certification of compliance." The requirement only applies to TARP recipients and, for public companies, must be filed with the SEC. The Act specified an annual filing, presumably with the annual report on Form 10-K.

In the letter written by Senator Dodd to Mary Schapiro, the Senator indicated that the certification applied to "compliance with executive compensation and corporate governance standards that have yet to be established by the Secretary of the Treasury."  As a result, he asserted that the certification did not have to be filed until the standards had been established.

The Commission likewise received authority to implement say on pay. The Stimulus Bill provides that TARP companies "shall permit" a non-binding shareholder vote "to approve the compensation of executives." The matter to be voted on? Compensation, "as disclosed pursuant to the compensation disclosure rules of the Commission (which disclosure shall include the compensation discussion and analysis, the compensation tables, and any related material)." In other words, it's the Commission that gets to define the subject matter to be voted on. The Commission has a year to adopt rules implementing the provision.

In the letter from Senator Dodd, he noted that while the effective date of the legislation was Feb. 17, the provision "would not apply to preliminary (and the related definitive proxy even if filed after February 17) or definitive proxy statements filed with the Securities and exchange Commission on or before February 17, 2009, but would apply to proxies filed after."

The position is a reasonable one and designed to avoid hardship on companies well into the proxy process.  Having said that, it appears to be inconsistent with the statute.  The Stimulus Bill provides as follows:

Any proxy or consent or authorization for an annual or other meeting of the shareholders of any TARP recipient during the period in which any obligation arising from financial assistance provided under the TARP remains outstanding shall permit a separate shareholder vote to approve the compensation of executives, as disclosed pursuant to the compensation disclosure rules of the Commission (which disclosure shall include the compensation discussion and analysis, the compensation tables, and any related material).

The provision is keyed to the meeting, not the filing of the proxy statement.  It suggests, therefore, that it applies to any meeting of a TARP recipient held after the effective date of the meeting.  The SEC will, therefore, have to decide whether to require say on pay even for companies that have already filed preliminary/final proxy statements without having yet held the meeting or only those that have not yet filed their proxy statements. 

Finally, the less noticed example of Commission authority under TARP is the definition of senior executive officer.  The term is used to determine those who are subject to limits on bonuses and golden parachutes, among other things.  The term is defined as the persons within the top

5 most highly paid executives of a public company, whose compensation is required to be disclosed pursuant to the Securities Exchange Act of 1934, and any regulations issued thereunder, and nonpublic

In other words, it is the top five officers who appear annually in a company's proxy statement.  These persons are determined by rules adopted by the SEC.  Item 402 of Regulation S-K traditionally defined the officers subject to compensation disclosure as the CEO and the four highest paid executive officers.  When the Commission amended the provision in 2006, the formula was changed to the CEO, CFO and the three highest paid executive officers.  TARP, therefore, gives to the SEC the authority to define the particular officers subject to the restrictions on compensation.

All of this deeply interjects the SEC into the governance process.  With respect to say on pay, the SEC decides what is voted on.  In addition, however, the SEC may find itself in the middle of disputes between management and shareholders over substantive issues such as who gets to cast a vote on the matter.  With respect to certification, the SEC will accept the filings and, presumably, ensure their accuracy.  This may mean enforcement proceedings that explore the role of the CEO, CFO and the board of directors in connection with executive compensation.  Finally, the SEC is the one that gets to decide the officers subject to the compensation restrictions.

These provisions only apply to a small number of companies (TARP companies) and will expire when the companies no longer have TARP financing.  Nonetheless, they lay the groundwork for greater SEC involvement in the corporate governance process.  It is highly likely that the SEC will, in the future, see its substantive authority in the governance area continue to grow at the expense of the states, particularly Delaware.

For more on the subject, see Essay: Corporate Governance, the Securities and Exchange Commission, and the Limits of Disclosure.

 

Full post as published by The Race to the Bottom on February 27, 2009 (boomark / email).