James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.
Comprehensive
corporate governance legislation has been introduced in the House that
would require a shareholder advisory vote on executive pay, allow
shareholders to nominate a candidate for director on management’s proxy
card, and eliminate uninstructed discretionary broker votes in
uncontested elections that allows fund managers to vote on investors’
behalf. The Shareholder Empowerment Act of 2009, HR 2861, would also
require that a board chair be completely independent from executive
management, thereby prohibiting the CEO from concomitantly serving as
chair of the board.
The
Act would stop golden parachutes to executives terminated for poor
performance. It would also curb excessive risk taking of the sort that
led to the financial crisis by requiring shareholders to be informed of
the performance targets being used to determine bonuses and other
incentives. The Act even includes clawback provisions allowing the
recovery of executive bonuses or other payments awarded on the basis of
fraudulent or faulty earnings statements. The company must have a
policy on reviewing this type of variable incentive compensation; and
the policy should require recovery or cancellation of any unearned
payments to the extent that it is feasible and practical to do so.
Under
the plurality voting standard that is the default standard in most
corporation codes, the candidate receiving the most votes for director
is elected. In uncontested elections, shareholders can protest a
candidate for director by withholding their vote, but there is no
mechanism for opposing a candidate, even one vote is enough to win.
The
legislation would require a candidate for the board in an uncontested
election to receive votes from a majority of shareholders; and would
also require a candidate running unopposed for election to resign if he
or she failed to obtain majority shareholder approval.
Currently,
companies can keep shareholder nominees for director off the proxy
ballots. The measure would give shareholders that have held at least
one percent of a company’s shares for one year access to the proxy to
nominate director candidates.
Under
the legislation, any compensation adviser hired by the company must be
independent and must also report solely to the full board of directors
or the compensation committee. Moreover, companies are prohibited from
agreeing to indemnify or limit the liability of compensation advisers.
The SEC is directed to implement this provision within one year.
In
doing so, the SEC must consider a number of factors pertaining to the
compensation adviser’s independence. The legislation states that the
SEC must consider the extent, as measured by annual fees and other
metrics, to which the adviser or advisory firm provides services in
conjunction with negotiating compensation agreements with the company’s
executives, as compared to other services that the adviser provides to
the company or executives. The SEC must also consider whether
individual advisers are permitted to hold equity in the company; and
whether an advisory firm’s incentive compensation plan links the
compensation of individual advisers to the firm’s provision of other
services to the company.
The
legislation also directs the SEC to adopt rules requiring additional
disclosure of specific performance targets that companies use to
determine a senior executive officer’s eligibility for bonuses, equity
and incentive compensation. The Commission must consider methods to
improve disclosure in situations where it is claimed that disclosure
would result in competitive harm; including requirements that the
company describe its past experience with similar target levels,
disclose any inconsistencies between compensation targets and targets
set in other contexts, submit a request for confidential treatment of
the performance targets under SEC rules, or disclose the data after
disclosure would no longer be considered competitively harmful.
Under the
legislation, the chair of the board of directors must be an independent
director who has not previously served as an executive officer of the
company. The legislation defines an independent director as one who
during the preceding 5 years has not been employed by the company in an
executive capacity; has not been an employee, director or owner of
greater than 20 percent of the beneficial shares of a firm that is a
paid adviser or consultant to the company; has not been employed by a
significant customer or supplier; has not had a personal services
contract with the company, or with the chair, the CEO, or other senior
executive officer; has not been an employee, officer or director of a
foundation, university or other non-profit organization that receives
the greater of $100,000 or 1 percent of total annual donations from the
company; has not a relative of a company executive; has not
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