Corporate & Securities Law

By Jim Hamilton

Revised Senate Financial Reform Bill Enhances Corporate Governance

The revised draft of the Senate Banking Committee financial reform bill enhances corporate governance and mandates increased transparency of executive compensation. The bill gives shareholders a say on pay with the right to a non-binding vote on executive pay. This advisory vote on executive compensation is designed to give 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 also authorizes the SEC to grant shareholders proxy access to nominate directors. It also requires directors to win by a majority vote in uncontested elections, which should help shift management?s focus from short-term profits to long-term growth and stability

Most public companies currently elect directors using the plurality standard, by which shareowners may vote for, but not against, a nominee. If shareowners oppose a particular nominee, they may only withhold their votes. As a consequence, a nominee only needs one ?for? vote to be elected and unseating a director is virtually impossible. Plurality voting in uncontested situations results in ?rubber stamp? elections. Majority voting ensures that shareowners? votes count and makes directors more accountable to shareowners.

The draft also requires for exchange listing that compensation committees include only independent directors and have authority to hire compensation consultants. This provision is designed to strengthen their independence from the executives they are rewarding or punishing.

The bill would require public companies to set policies to take back executive compensation if it was based on inaccurate financial statements that don?t comply with accounting standards. The measure directs the SEC to clarify disclosures relating to compensation, including requiring companies to provide charts that compare their executive compensation with stock performance over a five-year period.

Full post as published by Jim Hamilton's World of Securities Regulation on March 15, 2010 (boomark / email).