The 21st of July will mark one full year since President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection bill into law, overhauling many parts of the Federal Code and empowering multiple federal agencies to issue myriad new rules affecting the boardroom. The Federal Reserve Bank of Boston hailed the changes as “revolutionary,” calling to mind another day that Americans have cheered in fireworks for two centuries.
President Barack Obama signs the Dodd-Frank Wall Street Reform and Consumer Protection financial overhaul bill at the Ronald Reagan Building in Washington, D.C.
But the Dodd-Frank “revolution” needs no fireworks to be remembered. It lives on in new governance practices and rules—many still pending due to controversy or the sheer mass of work involved.
Here’s a running tally of the major changes that have been taking place over the past year as a result of Dodd-Frank.
Risk Committees Rising
Title I of Dodd-Frank (“Financial Stability”) mandates risk committees for large banks. Before this, all banks had management committees monitoring risk and reporting to the board, but not all banks had board-level committees. The law changed that.
- Most large banks have risk committees now. Earlier this year, Morgan Stanley revised the charter of its board risk committee (as distinguished from its “firm risk committee”). The charter states that the committee helps the board oversee “(i) the Company’s risk governance structure, (ii) the Company’s risk management and risk assessment guidelines and policies…(iii) the Company’s risk tolerance, and (iv) the performance of the Company’s Chief Risk Officer.”
- The number of risk committees in nonbanks is growing as well. The NACD 2010 Public Company Governance Survey found that 10 percent of boards have committees dedicated to risk—twice as many as in 2009. The trend is continuing this year, based on preliminary results from the 2011 survey. Earlier this year, General Electric formed a risk committee with a detailed charter. (Note: The NACD 2009 Blue Ribbon Commission report on risk governance, written during the financial crisis so well before the advent of Dodd-Frank, recommended that risk oversight be a responsibility of the full board and each of its committees. The report also recommended the use of a risk committee to coordinate this oversight.)
Clawbacks are Coming
Two titles of Dodd-Frank—one for banks and one for all companies— mandate clawbacks. Dodd-Frank Title II (“Orderly Liquidation Authority”) says the Federal Deposit Insurance Corporation “as receiver may recover from senior executives and directors who were substantially responsible for the failed condition of a covered financial company any compensation that they received during the two-year period preceding the date on which the FDIC was appointed as receiver.” In cases of fraud, there is no two-year limit; the FDIC will be able to claw back into the distant past. Title IX of Dodd-Frank (“Investor Protections and Improvements to the Regulation of Securities”) applies only to executives, and it mandates clawbacks following accounting restatements.
- The Title II bank clawback rules for bank directors and executives are here— almost. (Title IX clawbacks for nonbanks are postponed.) As of June 2011, the FDIC is reviewing comments on rules it proposed March 15 (with a comment deadline of May 15). The proposed rules explain how the agency would determine a director’s or officer’s “responsibility” for a large financial institution’s failure.
- Sen. Orrin Hatch (R-Utah) wrote recently to Treasury Secretary Timothy Geithner seeking a delay of Dodd-Frank implementation for banks. “I have real concerns that a lack of due diligence in the implementation of Dodd-Frank will result in unduly burdensome regulations that will undermine the competitiveness of our domestic financial industry,” wrote Sen. Hatch. Certainly this can be said of the clawbacks of bank director pay following bankruptcy based on the notion of “responsibility” for bank failure, which can sometimes stem from government regulations themselves, as noted in the minority report within The Financial Crisis Inquiry Report, from the National Commission on the Causes of the Financial and Economic Crisis in the United States.
Disclosures
Title IX of Dodd-Frank mandates several new disclosure provisions impacting boards—some now final, but most still pending.
Final rules under Title IX now having an impact include:
- Board leadership disclosures. These were mandated in time for the 2010 proxy season and inspired a change in policy for the influential Institutional Shareholder Services for the 2011 proxy season. Prior to the 2011 season, ISS stated, “Beginning in 2011, ISS will generally recommend a vote FOR shareholder proposals requiring that the chairman’s position be filled by an independent director absent compelling company-specific circumstances that challenge the efficacy of appointing an independent chair; and a robust counterbalancing governance structure.” Companies with such resolutions in their 2011 proxies include Dominion Resources, Frontier Communications, Nucor, Union Pacific and Wells Fargo.
- Rules on mandated shareholder approval for compensation—“say on pay”—and golden parachutes. The Securities and Exchange Commission issued final say-on-pay rules in January, effective in April. In a timely move, the American Federation of Labor-Congress of Industrial Organizations (AFL-CIO), this month launched a new version of its Executive Pay Watch website. The site features a searchable database with CEO pay information from 299 S&P 500 companies that have filed proxy materials for 2011. During the 2011 proxy season, more than a dozen pay plans have gotten shot down—including negative votes at AIG, Beazer Homes, Hewlett-Packard (in a very close vote), Stanley Black & Decker and Umpqua Holdings. According to Broc Romanek of The Corporate Counsel and Kevin Lacroix of Oakbridge Insurance Companies, a number of companies receiving negative votes on pay packages are also getting sued, along with their boards and compensation consultants— including, most recently, Beazer, in Fulton County, Ga., Superior Court. Georgia is considered to have a moderate liability climate, based on rankings issued by the U.S. Chamber of Commerce’s Institute for Legal Reform, so the outcome of this case is a coin toss.
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