Throughout 2011, I'm pretty sure I heard every possible Dodd-Frank implementation forecast possible. Here are just a few: the new law will require 10 times as much compliance work as Sarbanes-Oxley while squashing U.S. competitiveness and innovation; the new law will become so watered-down that it will stand no chance of preventing a second "Too Big to Fail" global financial meltdown; the new law will be overturned and zapped from existence.
These theories sound grand, or scary, depending on your perspective (and politics, I suppose), but they are not much help from a practical perspective. For example, as previously noted, the SEC has extended the comment period on a key proposal within Dodd-Frank.
To get a better feel for the new law and its ongoing implementation, I contacted John Wilson, a partner in law firm Foley & Lardner LLP's transactional and securities practice, and got his input into what it all will mean for finance managers.
Eric Krell: First, can you fill me in on the current status of Dodd-Frank rules that apply to proxy statements?
John Wilson: The good news for public companies is that there is not much new from a disclosure requirement perspective for the 2012 proxy season as a result of SEC rules pursuant to the Dodd-Frank Act. In fact, the only current new requirement is that companies must disclose for the first time in their Compensation Discussion and Analysis (CD&A) in the proxy statement whether and, if so, how the company considered the results of the most recent say-on-pay vote in determining compensation policies and decisions and how that consideration affected the company's executive compensation decisions and policies. Companies that had say-on-pay votes that were less than 70 percent in favor during 2011 in particular should give careful thought to this disclosure.
The SEC proposed rules in March 2011 requiring additional disclosure in proxy statements regarding whether a compensation consultant has been retained, the terms of the engagement, and conflicts related to compensation consultants. The SEC recently delayed its planned timetable for adoption of final rules to between January and June 2012 and thus it is unlikely that these rules will be applicable to most companies for the 2012 proxy season.
The SEC had planned to propose rules by December 2011 and adopt final rules by June 2012 requiring the following new proxy statement disclosures:
- Relationships between executive compensation and final performance of the company;
- Ratio of median employee total compensation vs. CEO total compensation; and
- Whether employees and directors may purchase financial instruments designed to hedge or offset decreased in market value of equity compensation awards.
However, the SEC recently delayed its planned timetable for these rules as well to between January and June 2012 for proposed rules and between July and December 2012 for final rules, meaning that these rules will not be applicable to the 2012 proxy season.
Krell: Are best practices emerging with regard to Dodd-Frank's say-on-pay requirements? If so, what are some of these practices?
Wilson: We are seeing best practices emerge out of lessons learned from the say-on-pay votes that occurred during 2011. Those practices include the following:
Be familiar with your significant shareholders and their proxy advisory firms, their voting policies, and how they evaluate executive compensation and performance.
Proactively communicate with significant shareholders about executive compensation in advance of the proxy season, as it can become difficult to secure time for calls or meetings once proxy season activities commence. Companies should make sure they specifically reach out to the governance personnel at institutional investors because the governance personnel are often different from the investment personnel who a company's investor relations personnel typically deal with.
Identify and consider changes to disfavored pay practices such as excessive perks, income tax gross-ups on perks and new severance agreements that contain payouts at greater than three times salary plus bonus, excise tax gross-ups or single-triggers upon a change in control of the company.
Update the Compensation Discussion and Analysis and the supporting statement for the say-on-pay proposal in the proxy statement to clearly depict how the company's pay arrangements encourage and reward performance (using graphics or charts where feasible) and highlight both the favored pay practices that the company maintains and the disfavored pay practices in which the company does not engage. Companies should include executive summaries that highlight the most relevant say-on-pay considerations.
If the company had in 2011 or is likely to in 2012 have significant "no" votes on say-on-pay (i.e., less than 70 percent in favor), develop a plan to address the applicable compensation issues, including having the compensation committee revisit past compensation decisions that are likely to contribute to a negative vote.
Krell: Can you provide a high-level update on proxy access and related shareholder proposals?
Wilson: In July 2011, a U.S. Court of Appeals decision overturned the SEC's mandatory proxy access rule, which would have required companies to include shareholder nominees in company proxy materials in certain circumstances. However, amendments to SEC Rule 14a-8 became effective in September 2011 that permit proxy access "private ordering." Shareholders are now able to submit proposals at 2012 meetings requesting companies to amend their governing documents to specify procedures by which shareholder nominees may include director nominees in the company's proxy materials.
As a result, we will now see shareholders seeking proxy access on a company-by-company basis. There will be a number of issues with respect to these shareholder proposals that will impact whether shareholders will vote in favor of them such as the share ownership percentage and time period thresholds for eligibility to nominate directors, the maximum proportion of directors shareholders may nominate and how such nominations will be allocated among shareholders.
To date, a handful of companies have received proposals with some at lower thresholds (e.g., 1 percent share ownership for one year) than under the SEC rules (3 percent share ownership for three years). We will need to see how votes on these proposals play out in 2012 before we know if a standard proposal will develop that shareholders will want to adopt at companies across the board as was the case with majority voting proposals a few years ago.
Krell: Are there any other noteworthy Dodd-Frank-related developments you are tracking right now?
Wilson: There are two SEC rulemakings that will impact corporate governance and executive compensation that we expect to occur in the relatively near future. First, the SEC is planning to propose rules between January and June 2012 mandating that the national securities exchanges adopt listing standards requiring companies to adopt so-called compensation clawback policies providing that if a company has an accounting restatement due to material noncompliance with financial reporting requirements under federal securities laws, then it must recover incentive-based compensation paid to executive officers on the basis of erroneous data. The SEC is planning to adopt final rules between July and December 2012. The securities exchanges will still have to implement the listing standards after the SEC adopts final rules.
The other area is the proposed rules the SEC issued in March 2011 mandating that the national securities exchanges adopt listing standards regarding independence of compensation committee members, compensation committee authority to engage and fund compensation consultants, independent legal counsel and other advisers, and the independence of such advisers. The SEC is planning to adopt final rules between January and June 2012. Like the rules on clawback policies, the securities exchanges will then need to implement the listing standards, so it is not clear when these requirements will become applicable to public companies.