Monday, June 29, 2009

Say, Say, Say, Say-on-Pay

I had shared with a fellow blogger (Broc Romanek of last month that I had a certain video in mind to use in a post on Say-on-Pay; I had planned to use it when proposed legislation or regulation was a little farther along, but in light of recent events – the sudden passing of Michael Jackson at age 50 last week - I have decided to use the video (with apologies to Jim Peterson, author of the Re: Balance blog) and write about this topic today.

To recap (Say-on-Pay, not MJ – for that check other news sources):
On June 10, U.S. Treasury Secretary Timothy Geithner announced the administration’s plan for reforming executive compensation practices. He emphasized the government was not going to cap the level of pay or prescribe how pay should be determined, but rather set certain requirements relating to corporate governance and disclosure. The five principles on which reform should be based, he said, are:
  1. compensation plans should properly measure and reward performance. For example: “performance based-pay should be conditioned on a wide range of internal and external metrics, not just stock price.”
  2. compensation should be structured to account for the time horizon of risks. For example: “companies should seek to pay top executives in ways that are tightly aligned with the long-term value and soundness of the firm. Asking executives to hold stock for a longer period of time may be the most effective means of doing this, but directors and experts should have the flexibility to determine how best to align incentives in different settings and industries.”
  3. compensation practices should be aligned with sound risk management. For example: “compensation committees should conduct and publish risk assessments of pay packages to ensure that they do not encourage imprudent risk-taking.”
  4. golden parachutes and supplemental retirement packages should be reexamined as to whether they align the interests of executives and shareholders.
  5. transparency and accountability in the process of setting compensation should be promoted.
Geithner added, “We intend to work with Congress to pass legislation in two specific areas:
  • we will support efforts in Congress to pass "say on pay" legislation, giving the SEC authority to require companies to give shareholders a non-binding vote on executive compensation packages. "Say on pay" – which has already become the norm for several of our major trading partners, and which President Obama supported while in the Senate – would encourage boards to ensure that compensation packages are closely aligned with the interest of shareholders. See Treasury’s Say on Pay Fact Sheet.
  • we will propose legislation giving the SEC the power to ensure that compensation committees are more independent, adhering to standards similar to those in place for audit committees as part of the Sarbanes-Oxley Act. At the same time, compensation committees would be given the responsibility and the resources to hire their own independent compensation consultants and outside counsel. See Treasury’s Comp Committee Independence Fact Sheet.
In remarks the same day (June 10), SEC Chairman Mary Schapiro said: “We will be considering several proposals requiring greater disclosure about:
  • how a company — and its board — manages risks.
  • a company’s overall compensation approach
  • potential conflicts of interest by compensation consultants. As part of this, she explained, “the SEC may require disclosure of relationships between the consultants and the company and their affiliates, so both compensation committees and investors will be better able to assess the advice the consultants provide.”
  • director nominees, including their experience and qualifications to serve on the board or on particular board committees — and about why a board has chosen its particular leadership structure
On June 11, the House Financial Services Committee held a hearing on Compensation Structure and Systemic Risk. Testifying at that hearing were representatives of the Fed, Treasury and SEC, as well as numerous experts on compensation, corporate governance and investor advocacy. Michelle Leder of was among those who live tweeted from that hearing.

Last week, the SEC published a Sunshine Act Notice announcing it will hold an open Commission meeting this Wednesday, July 1, at which the Commission will consider various proposals that relate directly and indirectly to Say-on-Pay. Specifically, the Commission will consider at its meeting this week:
  • whether to propose amendments to the proxy rules under the Securities Exchange Act of 1934 to set forth requirements for U.S. registrants that have received financial assistance under the Troubled Asset Relief Program and that are required, pursuant to Section 111(e) of the Emergency Economic Stabilization Act of 2008, to include an advisory shareholder vote on executive compensation.
  • whether to propose amendments to rules under the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Company Act of 1940 to enhance the disclosures that registrants are required to make about compensation and other corporate governance matters, and to clarify certain of the rules governing proxy solicitations.
  • whether to approve the proposed rule change, as modified by Amendment No. 4, filed by the New York Stock Exchange, Inc. to amend NYSE Rule 452 and corresponding Listed Company Manual Section 402.08 to eliminate broker discretionary voting for the election of directors, except for companies registered under the Investment Company Act of 1940, and to codify two previously published interpretations that do not permit broker discretionary voting for material amendments to investment advisory contracts with an investment company.

Based on the language in Geithner's June 10 statement, noting that the Obama administration will "support efforts in Congress to pass "say on pay" legislation, giving the SEC authority to require companies to give shareholders a non-binding vote on executive compensation packages," the action being taken this week by the SEC is likely the tip of the iceberg, by focusing on TARP recipients which are now required by law to provide say-on-pay. For more insights into the developments on Say-on-Pay, see Blog, particularly Broc Romanek's post on June 25, and his colleague Dave Lynn's post on June 11. See also Ted Allen's June 10 post in The RiskMetrics Group Blog.

In related news, a new organization was announced last week,, self-described as a "social networking site... working to help promote market fairness for investors." The organization's June 25 press release noting their formation also provides highlights from a recent survey conducted by Opinion Research Corp which showed, among other things, that 77% of the 1,256 U.S. investors surveyed favor say-on-pay.

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