Corporate Governance

Say on Pay and SEC Rulemaking (The Impact of the Advisory Vote)

By J Robert Brown Jr.

The SEC has put out a rule proposal designed to implement the say on pay provisions in Dodd-Frank.  See Exchange Act Release No. 63124 (Oct. 18, 2010).??

Say on pay has always been structured as an advisory vote.  Dodd Frank and Rule 14a-21 do nothing to change that.  As a result, boards are free to ignore negative votes by shareholders on the pay packages submitted for their approval. 

Nonetheless, the SEC's proposal would at least require companies to announce their policies in advance with respect to the advisory votes.  As the release states:

• Our proposals would amend Item 402(b) to require issuers to address in CD&A whether and, if so, how their compensation policies and decisions have taken into account the results of shareholder advisory votes on executive compensation. This proposed new disclosure is not mandated by Section 951 of the Act, but we believe that a requirement to provide that information would facilitate better investor understanding of issuers' compensation decisions. We note that the shareholder advisory vote on executive compensation will apply to all issuers, and as a result, we view information about how issuers have responded to such votes as more in the nature of a mandatory principles-based topic than an example. The manner in which individual issuers may respond to such votes in determining executive compensation policies and decisions will likely vary depending upon facts and circumstances. Accordingly, the proposal would amend Item 402(b)(1) to require issuers to address in CD&A whether, and if so, how they have considered the results of previous shareholder votes on executive compensation required by Section 14A and Rule 14a-20 in determining compensation policies and decisions and, if so, how that consideration has affected their compensation policies and decisions.

This is an area that will likely be laden with boiler plate (aka palaver about facts and circumstances).  Nonetheless, it will force boards to think about these things in advance, before there is an actual adverse vote on compensation.  Anything that brings an issue to the attention of the board and requires affirmative consideration will likely result in at least some postive and thoughtful responses. 

Full post as published by The Race to the Bottom on November 04, 2010 (boomark / email).