United States: Capitol Hill Takes on Executive Compensation and Corporate Governance

Originally published June 17, 2010

The current global financial crisis, government bailouts and the ensuing contraction of the credit markets have led to calls for increased regulation and government oversight of Wall Street. The U.S. Senate weighed in on the debate when, on May 20, 2010, it passed the Restoring American Financial Stability Act of 2010 (the RAFSA).¹ The RAFSA follows the December 2009 passage of the U.S. House of Representatives' Wall Street Reform and Consumer Protection Act (the House bill).² The process of reconciling the RAFSA and the House bill began on June 11, and the conferees expect to present legislation for President Obama's signature before the July recess. Negotiations between House and Senate conferees over corporate governance provisions began on June 16. While the House bill contained far fewer corporate governance-related provisions, the base text of the bill used in legislative conference contains the same governance provisions provided for in the RAFSA.

This Legal Alert will summarize the RAFSA's corporate governance and executive compensation provisions in anticipation of the release of the reconciled bill from conference, particularly in light of the negotiations already taking place on the provisions in conference. For example, the conferees appear to be eliminating provisions for mandatory majority voting for directors and appear to have rejected a proposal to mandate a non-binding shareholder vote on "golden parachute" packages. The analysis of the RAFSA corporate governance and executive compensation provisions in this Legal Alert will be described in the context of the broader movement for financial regulatory reform, including new and pending Securities and Exchange Commission (SEC) rules covering proxy disclosure and proxy access.

Proxy Access for Shareholder Nominees

Section 972 of the RAFSA would give the SEC explicit authority to make rules requiring an issuer to include shareholder nominees in its proxy solicitation materials. Notably, however, the RAFSA would not require the SEC to issue such rules.

The SEC has already proposed similar proxy access rules that would permit shareholders meeting certain thresholds to place their own nominees alongside a company's nominees in the company's proxy materials.³ At a June 9 meeting of the Business Roundtable in Washington, SEC Chairman Mary Schapiro reiterated that proxy access rulemaking would be done in a time frame which would allow nominees for the 2011 annual meeting season. She also noted that a Concept Release on proxy access would be issued soon.

On June 16, the Senate conferees appeared to have accepted a House provision to impose a 5% ownership standard and a two-year holding period on shareholders who wish to nominate directors.4 During negotiations on June 17, the Senate representatives votes 8 to ⁴ against a motion to remove those limits.⁵ Under the RAFSA, as well as in the base text used in conference, the setting of any standards would have been left to the SEC.

Discretionary Broker Voting

Section 957 of the RAFSA would, in certain circumstances, prohibit brokers that are not beneficial owners of shares from exercising their discretion to vote those shares by proxy. Brokers would be prohibited from voting on director elections, executive compensation or any other "significant matter" (to be defined in future SEC rules) without specific voting instructions from the beneficial owner of the shares.

This provision follows the July 1, 2009 approval by the SEC of an amendment to New York Stock Exchange Rule 452 (NYSE Rule 452), applicable to all companies listed on the NYSE, which prohibits brokers from voting unrestricted shares in uncontested director elections without receiving specific voting instructions from beneficial owners.⁶

Majority Voting for Directors in Uncontested Elections

Section 971 of the RAFSA would mandate that directors be elected by a majority (in uncontested elections) or a plurality (in contested elections) of votes cast. In an uncontested election, the RAFSA would require a director who receives less than a majority of votes cast to tender his or her resignation. The board must accept the director's resignation unless it unanimously votes to reject it. If the board votes to reject the resignation, it must fully explain, within 30 days, why doing so is in the best interests of the issuer and its shareholders.

The RAFSA would direct the SEC, within one year of enactment, to issue rules requiring the national exchanges to prohibit listing any security of an issuer that does not comply with these requirements.

Footnotes

1. S. 3217, 111th Cong. (2010). The bill was returned to the Senate Calendar on May 25, 2010.

2. H.R. 4173, 111th Cong. (2009). The House bill, which incorporated the corporate governance provisions of the Corporate and Financial Institution Compensation Fairness Act, includes "Say on Pay" for all public companies, an independent compensation committee requirement for public companies, incentive-based compensation standards, and disclosure requirements applicable to financial institutions with $1 billion or more in assets.

3. Proposed Rule Facilitating Shareholder Director Nominations, Securities Act Release No. 9,046, Exchange Act Release No. 60,089, Investment Company Act Release No. 28,765 (proposed June 10, 2009), available at http://www.sec.gov/rules/proposed/2009/33-9046.pdf.

4. See Ted Allen, Senate Seeks to Drop Majority Voting From Reform Bill and Weaken Proxy Access, available at http://blog.riskmetrics.com/gov/2010/06/senate-seeks-to-drop-majority-voting-from-reform-bill-and-weaken-proxy-access.html.

5. See Ted Allen, Senate Conferees Vote to Restrict Proxy Access, available at http://blog.riskmetrics.com/gov/2010/06/senateconferees-vote-to-restrict-proxy-access.html.

6. The amendment to NYSE Rule 452 took effect for shareholder meetings held on or after January 1, 2010. See Order Approving Proposed Rule Change, as modified by Amendment No. 4, to Amend NYSE Rule 452, Exchange Act Release No. 60,215 (approved July 1, 2009), available at http://www.sec.gov/rules/sro/nyse/2009/34-60215.pdf.

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This article is for informational purposes and is not intended to constitute legal advice.