This presentation is based on Bainbridge, Stephen M., Dodd-Frank: Quack Federal Corporate Governance Round II (September 7, 2010). UCLA School of Law, Law-Econ Research Paper No. 10-12, forthcoming in the Minnesota Law Review. Available at SSRN: http://ssrn.com/abstract=1673575
Key provisionsSection 951’s so-called “say on pay” mandate, requiring periodic shareholder advisory votes on executive compensation.Section 952’s mandate that the compensation committees of reporting companies must be fully independent and that those committees be given certain specified oversight responsibilities.Section 953’s direction that the SEC require companies to provide additional disclosures with respect to executive compensation.Section 954’s expansion of SOX’s rules regarding clawbacks of executive compensation.Section 971’s affirmation that the SEC has authority to promulgate a so-called “shareholder access” rule pursuant to which shareholders would be allowed to use the company’s proxy statement to nominate candidates to the board of directors.Section 972’s requirement that companies disclose whether the same person holds both the CEO and Chairman of the Board positions and why they either do or do not do so.--Dodd Frank 404 relief for micro caps--mandatory risk management committees for BHCs and nonbank financial instituitions
It seems clear that systemic flaws in the corporate governance of Main Street corporations were not a causal factor in the housing bubble, the bursting of that bubble, or the subsequent credit crunch. To the contrary, “[a] striking aspect of the stock market meltdown of 2008 is that it occurred despite the strengthening of U.S. corporate governance over the past few decades and a reorientation toward the promotion of shareholder value.” Brian R. Cheffins, Did Corporate Governance “Fail” During the 2008 Stock Market Meltdown? The Case of the S&P 500, 65 Bus. Law. 1, 2 (2009).But what about bank corporate governance? Especially executive compensation practices. Here opinion is sharply divided.For a good overview see Skeel, David A., The New Financial Deal: Understanding the Dodd-Frank Act and its (Unintended) Consequences (October 27, 2010). THE NEW FINANCIAL DEAL: UNDERSTANDING THE DODD-FRANK ACT AND ITS (UNINTENDED) CONSEQUENCES, Wiley, November 2010 ; U of Penn, Inst for Law & Econ Research Paper No. 10-21. Available at SSRN: http://ssrn.com/abstract=1690979See also Kling, Arnold, Not What They Had in Mind: A History of Policies that Produced the Financial Crisis of 2008 (September 15, 2009). Available at SSRN: http://ssrn.com/abstract=1474430.
Limited liability means that corporate officers and directors, like shareholders, are not liable for the firm’s debts or other obligations. In contrast, options and other forms of incentive-based pay offered executives potentially enormous upside gains. Because risk and return are positively correlated, however, this meant taking on ever-increasing risks.Because shareholders have a long-term investment horizon, they prefer risk-return policies that produce sustainable share price appreciation. But when we put limited liability and option-based compensation together with the relatively short vesting period for compensatory stock options relative to the long maturity of mortgage loans, banks ended up rewarding executives for short term returns while not holding them responsible for long term risks. Stock options thus give management a short term investment horizon creating incentives to push the share price up, but not necessarily in a sustainable way.Scholars are divided as to whether this incentive structure causally contributed to either the housing or credit crunch. What seems clear, however, is that the problem was localized to the financial sector. Whether or not financial institution executive compensation practices contributed to the crisis, there is no evidence that executive compensation at Main Street corporations did so.
Key provisionsSection 951’s so-called “say on pay” mandate, requiring periodic shareholder advisory votes on executive compensation.Section 952’s mandate that the compensation committees of reporting companies must be fully independent and that those committees be given certain specified oversight responsibilities.Section 953’s direction that the SEC require companies to provide additional disclosures with respect to executive compensation.Section 954’s expansion of SOX’s rules regarding clawbacks of executive compensation.Section 971’s affirmation that the SEC has authority to promulgate a so-called “shareholder access” rule pursuant to which shareholders would be allowed to use the company’s proxy statement to nominate candidates to the board of directors.Section 972’s requirement that companies disclose whether the same person holds both the CEO and Chairman of the Board positions and why they either do or do not do so.--Dodd Frank 404 relief for micro caps--mandatory risk management committees for BHCs and nonbank financial instituitions
Curiously, there is disagreement as to whether Section 952 mandates that SRO listing standards require all listed companies to have an independent compensation committee. The issue has salience because current NASDAQ listing standards permit executive compensation decisions to be made either by a committee comprised solely of independent directors or by a majority of the independent directors. Nothing in § 952 or the legislative history addresses explicitly the status of those standards, thereby creating some uncertainty.
The pay equity disclosure requirement is going to be hugely burdensome:[It] means that for every employee, the company will have to calculate his or her salary, bonus, stock awards, option awards, nonequity incentive plan compensation, change in pension value and nonqualified deferred compensation earnings, and all other compensation (e.g., perquisites). This information would undoubtedly be extremely time-consuming to collect and analyze, making it virtually impossible for a company with thousands of employees to comply with this section of the Act.Warren J. Casey & Richard Leu, United States: New Executive Compensation Disclosures Under Dodd-Frank (August 3, 2010), Mondaq.com, http://www.mondaq.com/unitedstates/ article.asp?articleid=106962. See also Jean Eaglesham & Francesco Guerrera, Pay Law Sparks “Nightmare” on Wall St, Fin. Times, Aug. 31, 2010, at 1 (“The rules’ complexity means multinationals face a "logistical nightmare" in calculating the ratio, which has to be based on the median annual total compensation for all employees, warned Richard Susko, partner at law firm Cleary Gottlieb. "It's just not do-able for a large company with tens of thousands of employees worldwide.”).
Dodd-Frank § 951 creates a new § 14A of the Securities Exchange Act, pursuant to which reporting companies must conduct a shareholder advisory vote on specified executive compensation not less frequently than every three years. At least once every six years, shareholders must vote on how frequently to hold such an advisory vote (i.e., annually, biannually, or triannually). The compensation arrangements subject to the shareholder vote are those set out in Item 402 of Regulation S-K, which includes all compensation paid to the CEO, CFO, and the three other highest paid executive officers. In addition, a shareholder advisory is required of golden parachutes. Both such votes must be tabulated and disclosed, but neither is binding on the board of directors. The votes shall not be deemed either to effect or affect the fiduciary duties of directors. The SEC is given exemption power and is specifically directed to evaluate the impact on small issuers.S. Rep. No. 111-176, at 133 (2010).
