A bill intended to address the problems that plunged the U.S. into full-blown financial crisis in 2008 has recently become law. The Dodd-Frank Wall Street Reform and Consumer Protection Act contains some key corporate governance provisions. These are of obvious interest to Canadian investors in U.S. equities. They are also worthy of note by Canadian companies and their investors because of the significant influence that U.S. developments have in our market.
New governance requirements for most U.S. firms are:
- Say on pay: companies must provide shareholders with a non-binding vote on the executive pay policies and practices they disclose in their proxy materials. They may also ask shareholders to ratify holding the vote every two or three years instead of having an annual vote on pay.
- Say on severance: shareholders will also have a non-binding vote on severance payments – commonly referred to as ‘golden parachutes’ due to their typically large value – that are awarded in the context of a sale, merger or consolidation of the company.The bill gives the SEC authority to exempt small public companies from the requirements described above.
- Pay clawbacks: companies must establish a policy that if financial results are restated and compensation previously paid was based on corporate performance that was not in fact achieved, the company will recover the excess from the executive(s).
- Proxy access: the Securities and Exchange Commission (SEC) is authorized to make rules governing the nomination of directors by shareholders for inclusion in the company’s proxy materials. This is commonly referred to as proxy access.
- Pay ratio disclosure: companies will be required to disclose the median pay of all employees other than the CEO, the pay of the CEO, and the ratio of the two amounts. This is commonly referred to as pay disparity in the U.S.
- Compensation committee independence: directors sitting on the committee responsible for pay decisions must be independent of management.
- Compensation committee advisor considerations: advisors to the compensation committee are not required to be independent of company management, but the committee must consider various factors affecting the independence of outside advisors before it hires them to assist it in making pay decisions.
Compromises were made on the way to finalizing the bill, some affecting the governance provisions. Majority voting in director elections, which would have provided that directors must receive the support of a majority of votes cast to be elected, was included in earlier versions of the bill, but dropped from its final incarnation.
On Wednesday, July 22, President Obama signed the bill into law.