Exploring Corporate Governance Around the World

By Allison Garrett, Senior Vice President for Academic Affairs at Oklahoma Christian University

Monday, July 19, 2010

Wall Street Reform (a/k/a Whizzer) Act

Sometime this week, President Obama should sign the Dodd-Frank Wall Street Reform and Consumer Protection Act. It's an act that cries out for a catchy name. My proposal? WSR (pronounced "whizzer").

As SEC Chair Mary Schapiro said recently, "the SEC's job is not to define for the market what constitutes 'good' or 'bad' governance . . . . Rather, the SEC's job is to ensure that its rules support effective communication and accountability." In other words, the SEC doesn't prohibit the selling of rotten eggs to investors; it just requires that the sellers tell you how rotten the eggs are.

In response to the passage of the act and Obama's signing of it sometime this week, the SEC minions will begin a lengthy and tedious spate of drafting to craft the specific regulations that implement the new law.

I've spent a little quality, cure-for-insomnia time looking at the provisions of the new law, and want to point out a few highlights and lowlights:

1. Say-on-pay -- At least once every 3 years, shareholders get to vote on executive pay. The vote is precatory, and voting could be required as early as the 2011 shareholder meetings. Previously, shareholders were largely limited to voting on stock plans under which executives were granted options, restricted stock and similar things. The compensation committee, comprised of directors that the shareholders elected, reported annually to shareholders on executive compensation and also voted on bonuses and other pay that caused pay to exceed $1 million per person (this wasn't required, but IRC section 162(m) doesn't allow a company to deduct such pay unless the performance targets are set by disinterested directors).

2. Broker Voting of Shares Sans Instructions -- The exchanges must prohibit brokers from voting shares for which they have not received voting instructions from the beneficial owners. It will be interesting to see what effect this provision has on quorums; it may mean good business for the proxy solicitation firms.

3. Compensation Committee Membership -- The new law essentially codifies the independence rules already in place as part of the listing standards for each exchange. The Compensation Committee will have the authority to appoint and oversee the work of any compensation consultants, as well. This is a departure from the usual process of the company's HR executives engaging the consultants and then reporting to the committee.

4. Compensation Disclosure -- The SEC must amend its disclosure rules to provide for closer linkage between an issuer's financial performance and executive pay. Financial performance is already included in the proxy statement, as is executive pay. The yet-to-be-written rules will require that these two items be discussed in greater detail.

A second provision (I'll call it "the Ben and Jerry's provision") requires that the issuer disclose median pay for all other employees of the issuer. The value of benefits would be excluded. For seasonal industries or those with a high level of part time employees, it is unclear whether they are covered by the Ben and Jerry's provision or whether the SEC either must or may include provisions to address their pay.

5. Hedging -- Under WSR, the SEC will be drafting proxy disclosure rules that require employees' and directors' hedging activities to be disclosed. It makes sense that the SEC would be expected to address activities that protect officers and directors from fluctuations in the price of the underlying securities. Drafting rules that cover the difference between a Rule 10b-5-1 trading plan and equity collars or forward contracts sounds headsplittingly tricky.

There are a myriad of other interesting provisions, but these are the attention-getters for me. Perhaps I'll write more when I wake up from my nap.

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