A few days ago I discussed clawbacks (Post 1 of 8) under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Act"), signed into law by President Obama on July 21, 2010. As stated in that prior post, the Act contains significant executive compensation and corporate governance rules that apply to most public companies. This Post 2 of 8 discusses a say-on-pay requirement under the Act (the other say-on-pay requirement applies to golden parachute payments and will be addressed in Post 3 of 8) and a new prohibition on the ability of brokers to vote on compensation-related matters.
New Say-on-Pay Requirement
Under the Act, shareholders of most public companies must be provided with a non-binding advisory vote on executive compensation as disclosed under SEC rules. Specifically:
- A vote is required at least once every three years, beginning with the first shareholder meeting that occurs after January 21, 2011. In other words, say-on-pay will be required for many public companies this upcoming proxy season.
- At this first annual meeting, the shareholders must also decide on whether the vote should be held every one, two or three years (thereafter a vote on frequency must be held by a separate resolution no less often than every six years).
New Prohibition on Certain Votes from Brokers
The Act requires national securities exchanges to prohibit brokers from voting on executive compensation matters (including say-on-pay), director elections and any other significant matter (as determined by the SEC).
Say-on-pay votes apply to shareholder meetings that occur after January 21, 2011. The rule prohibiting certain discretionary voting by brokers is effective July 21, 2010.
Issues to Consider
There are many issues a company should consider when implementing say-on-pay, and even more if the company has a large percentage of retail shareholders. These include:
- How should a company revise its proxy statement to incorporate the mechanics of the say-on-pay mandate? How should it frame the resolution? Should the board of directors make a recommendation on the frequency of the vote?
- Consider whether a company should make changes to its CD&A and tabular disclosure since shareholders will now be voting on its overall disclosure.
- Assuming retail shareholders typically vote with management, it would follow that the influence of institutional shareholder advisory services (e.g., RiskMetrics Group, Glass Lewis) could be disproportionately increased if the beneficial owners of the shares do not provide voting instructions to the retail shareholders. This means a company may want to revisit its ability to comply with mandates set by shareholder advisory services (e.g., review change in control policies, employment agreements, separation pay arrangements, etc.).
- For those companies with a large percentage of retail shareholders, consider implementing ongoing educational campaigns with shareholders and beneficial owners to explain the company's compensation programs and educate beneficial owners that a failure to provide the broker with specific instructions would be the equivalent of a "no vote."
- Though say-on-pay is "nonbinding," keep in mind that compensation committee members would need to react to a failed say-on-pay proposal or risk receiving withhold votes during their reelection. Last proxy season the shareholders of three companies voted against management say-on-pay proposals (KeyCorp, Occidental Petroleum and Motorola). It could happen.
Given the number of action items a public company will need to consider or implement, the best advice is to prepare early, especially if shareholder educational campaigns need to be conducted. Until then, stay tune for more posts on the Act (Posts 3 through 8)!