• Financial Reform Bill Will Give Shareholders a Bigger Voice on Compensation and Corporate Governance
  • July 2, 2010
  • Law Firm: Alston & Bird LLP - Atlanta Office
  • In the early hours of the morning last Friday, the House-Senate Conference chaired by Senator Christopher Dodd and Representative Barney Frank reached an agreement on a historic financial reform bill, which conferees voted to call the "Dodd-Frank Act." The legislation, if approved by both houses of Congress and then signed by President Obama, will make sweeping reforms with respect to the financial services industry. Such reforms include, among others, the creation of a new Consumer Financial Protection Bureau within the Federal Reserve, and the implementation of the so-called "Volcker Rule," which largely prohibits big banking firms from trading with their own funds. In addition, the legislation will implement several measures intended to provide more transparency for shareholders with respect to executive compensation. These measures include notably the following, applicable to publicly traded companies:

    Non-Binding Vote on Compensation: Shareholders will be permitted to make a non-binding vote on the compensation of the corporation's executives, including compensation to be paid under “golden parachutes” in the context of a change in control. According to the legislation summary published by the Senate, "[t]his gives shareholders a powerful opportunity to hold accountable executives of the companies they own, and a chance to disapprove where they see the kind of misguided incentive schemes that threatened individual companies and in turn the broader economy."

    Additional Compensation Disclosures: The SEC will be required to promulgate rules regarding additional executive compensation disclosure, including requiring corporations to provide charts that compare compensation to stock performance.

    Nominating Directors: The SEC will have authority to grant shareholders proxy access to nominate directors, and stock exchanges must require that directors of a listed company be elected by a majority vote in uncontested elections. According to the Senate summary, these measures “can help shift management’s focus from short-term profits to long-term growth and stability.”

    Independent Compensation Committees: Companies with securities listed on an exchange must have only independent directors on their compensation committees.