As described in a recent Osler Update, on July 21, 2010, sweeping financial reform was signed into U.S. law by President Obama. The new law affects more than just Wall Street financial institutions and contains new requirements on corporate governance, federal securities law and executive compensation provisions.
In the Dodd-Frank Wall Street Reform and Consumer Protection Act, there are lots of new goodies on the executive compensation front. While most of the new compensation rules would not seem to apply to Canadian issuers (unless they are voluntarily complying with U.S. compensation disclosure rules instead of Canadian rules), they may indeed set a new standard for best practices because U.S. institutional investors will become accustomed to these requirements:
- Say on Pay will now be the law of the land in the U.S. Interestingly, the Act requires companies to allow shareholders a non-binding vote not only on the Company’s pay policies, but also to vote on how often they will vote on pay (annually, biennially, or triennially). Shareholders will also get to vote on golden parachute packages, in the context of a transaction.
- New proxy rules require a “pay equity” comparison, showing the ratio between the median total compensation for all employees worldwide, and the CEO’s total compensation. This comparison is expected to be a burdensome one to prepare.
- Compensation committee members must meet new independence standards, and further, they must consider the independence of their compensation advisers before engaging them, using factors that will be established by the SEC.
- Compensation claw-backs, which require executives to disgorge ill-gotten gains or bonuses, have become increasingly popular. The Act now requires issuers to develop a policy to recoup incentive payments made to current or former executive officers prior to any accounting restatement due to the issuer’s material non-compliance with financial reporting requirements and to disclose their policy to shareholders.
- The company must disclose whether employees or directors are allowed to purchase financial instruments that would hedge the downside risk in their stock compensation programs. I suspect that many companies that currently do not have a policy on this will soon be developing one, rather than disclose that the Company does not monitor executive and director hedging.
- Financial institutions will be subject to enhanced disclosure and reporting of executive compensation, with specific attention to incentive compensation that could lead to risk-taking and material loss to the institution. U.S. operations of foreign banks will be covered.