Friday November 28, 2014

A Dodd-Frank Cheat Sheet for New Directors

The Dodd-Frank Act introduced many new regulations on governance and compensation.

Dodd-Frank—two words that strike fear in the hearts of many new directors. Most of the 2,300-plus page Dodd-Frank Act relates to the banking and financial services industry. However, portions of the Act, dealing mostly with governance and compensation-related matters, apply specifically to public companies. What follows is a primer for new directors.

Governance Specifics
Say on Pay.
At least once every three years, public companies are required to include in their annual meeting proxy materials a shareholder resolution seeking a nonbinding advisory vote on named executive officer compensation. In addition, at least every six years, the annual meeting proxy materials are required to include a separate resolution seeking a non-binding advisory vote on whether the say-on-pay vote should occur every one, two or three years.

More stories in The Boardroom Guide for New Directors:
Securing Your First Public Company Board Seat: Mission Possible

Directors Registry Now Exceeds 4,000 Listings
A Performance in Three Acts

These requirements took effect during January 2011 for most domestic public companies other than smaller reporting companies; these companies become subject to the rules in 2013.

Michael R. Littenberg

Say on Golden Parachutes.
The proxy statement for a special meeting held in connection with a change in control transaction must seek a non-binding advisory vote on golden parachute arrangements for named executive officers, unless the arrangements previously were voted on by the shareholders at an annual meeting.

The special meeting proxy statement also must include enhanced disclosure of these arrangements, beyond what is required in annual filings that describe executive compensation arrangements. Unlike say on pay, smaller reporting companies do not get a grace period to comply with the say on golden parachute rules.

Proxy Access.
The SEC’s proxy access rules require public companies to include in their annual meeting proxy materials director candidates nominated by shareholders to the extent that the shareholder group has held at least three percent of the company’s voting power for at least three years and is not seeking control. Under the proxy access rules, shareholders can nominate up to 25 percent of the board. Proxy access was scheduled to take effect during November 2010 for most companies and three years later for smaller reporting companies. Within a matter of days after publication of the rules, a petition was filed with the D.C. Circuit seeking judicial review. A decision is expected by the summer.

Compensation Matters
Compensation Committee Independence.
Dodd-Frank requires the SEC to adopt rules directing the national securities exchanges to prohibit the listing of any equity security of a company that does not have an independent compensation committee that meets enhanced independence standards. In determining independence of a committee member, the exchanges will be required to consider other compensation paid to the member, including any consulting, advisory or other compensatory fee, and whether the member is affiliated with the company, one of its subsidiaries or an affiliate of a subsidiary.

Independence of Compensation Advisors.
When a compensation committee hires a compensation consultant, legal counsel or other advisor, it will be required to first consider certain independence factors, including the provision of other services to the company by the advisory firm, the amount of fees received from the company by the advisory firm as a percentage of that firm’s total revenue, the policies and procedures of the advisory firm designed to prevent conflicts of interest, any business or personal relationship between the advisor and members of the compensation committee and any stock of the company owned by the advisor.

The compensation committee still will retain discretion whether to obtain outside advice. And, although the committee will be responsible for the appointment, compensation and oversight of the advisor’s work, it will not be required to implement or act consistently with the advice or recommendations of the advisor. The SEC has indicated it intends to adopt rules giving effect to committee and advisor independence before August 2011. The rules generally will not apply to controlled companies and the SEC has discretion to exempt smaller public companies.

Enhanced Executive Compensation Disclosure.
The SEC is required to adopt rules mandating companies to disclose “pay versus performance” in the annual meeting proxy statement. Companies will be required to disclose information that shows the relationship between executive compensation paid and the company’s financial performance.

Dodd-Frank also requires the SEC to amend its executive compensation disclosure requirements to require companies to disclose the median annual total compensation of all employees excluding the CEO, annual total compensation of the CEO and the ratio of the former to the latter. Rules relating to these portions of Dodd-Frank are expected to be adopted before the end of 2011.

Compensation Clawbacks.
The national securities exchanges will be required to enhance their listing standards to require companies to adopt more expansive clawback policies. Under the new standards, if a listed company is required to prepare an accounting restatement due to material non-compliance with financial reporting requirements, it will be required to recover from any current or former executive officer who received incentive-based compensation based on the erroneous data during the preceding three-year period, the amount that is in excess of what would have been paid under the restated financial information. Expanded clawback rules are expected to be adopted by the SEC before the end of 2011.

Disclosure of Hedging Policies.
Companies will be required to disclose in their annual meeting proxy statements whether any of their employees or directors or their designees are permitted to purchase financial instruments (including equity swaps and collars) designed to hedge or offset a decrease in the market value of equity securities granted to the employees or directors as part of their compensation or held directly or indirectly by them. These disclosure requirements are expected to be adopted before the end of 2011.

Michael R. Littenberg is a partner in the New York office of Schulte Roth & Zabel LLP. He can be reached at

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