November 2010 elections gave Republicans a majority in the House and more votes in the Senate. Nonetheless, the Dodd-Frank Act, named after the two Democrats who sponsored it, lives on through the rule making of the Securities and Exchange Commission and other agencies. Specific to boards of directors, the SEC’s notable accomplishments to date include the following:
- Reprieve for smaller companies on auditor attestation. The SEC has conformed its internal-control audit requirements for smaller companies, amending its rules on September 15, 2010, to reflect a provision in Dodd-Frank that exempts them from the requirement on auditor attestation.
- Whistleblower incentives and protection. The SEC has proposed a new rule for comment due December 17, 2010.* In her address at the NACD Annual Corporate Governance Conference, SEC Chairman Mary Schapiro said that the rule implementing this provision should not weaken existing internal compliance cultures.
- Proxy access. The SEC in August passed a rule mandating this for certain shareholders, intended to be in effect for this proxy season. The rule has been tabled, pending the outcome of a legal challenge brought by the U.S. Chamber of Commerce and Business Roundtable.
- Elimination of broker discretionary voting on executive pay. In 2009, the SEC eliminated discretionary broker voting for directors. On September 9, 2010, to implement Dodd-Frank, the SEC proposed a New York Stock Exchange rule (still pending) that would eliminate such voting on executive pay at NYSE-listed companies. Since brokers normally vote with management, this puts more pressure on boards to persuade shareholders that the pay plans they approve are appropriate.
- Shareholder votes on executive compensation and golden parachutes. Newly proposed rules would enable shareholders to cast advisory votes on executive compensation and “golden parachute” arrangements. The SEC proposed two rules on these subjects on October 18, 2010, with a comment deadline of November 18, 2010.*
- Disclosure by investment advisors of votes on executive compensation. The proposed rules would require brokers to disclose how they voted on executive pay. Rules were proposed on October 18, 2010, with a deadline of November 18, 2010 for comment.
In addition, in response to longstanding general concerns about the proxy voting system, the SEC issued one of its rare concept releases—its tenth in five years—with a deadline of October 20, 2010, for comment.* Unlike the Dodd-Frank rule making, there’s no timetable; however, new rules are likely in 2011, so stay tuned.
*For NACD’s comment letters, please see www.sec.gov.
To Do’s
From April to July 2011, the Securities and Exchange Commission will address remaining issues surrounding the above rules, and will also propose rules on:
- Compensation committee and compensation advisor independence. Pending rules, to be issued in increments through Spring 2011, would add new stock exchange listing requirements in these areas.
- Definition of “other significant matters” for purposes of stock exchange standards regarding broker voting of uninstructed shares. Dodd-Frank says that stock exchanges must set standards for broker voting on director elections, executive compensation or “any other significant matter.” The SEC will be defining that final term.
- Disclosure of pay-for-performance, pay ratios of CEO to workers and hedging by employees and directors. SEC Chairman Mary Schapiro has acknowledged that any rules related to these provisions will take effect after the 2011 proxy season—a welcome reprieve for companies, given the busy season ahead.
- Recovery of executive compensation. If a company is required to file an accounting restatement due to material noncompliance with a financial-reporting requirement, the company must recover all incentive-based compensation related to the incorrect statement paid to current or former executives within the three-year period before the restatement.
Note: Title II of the Dodd-Frank Act also has compensation recovery provisions, applicable to directors as well as executives of financial institutions (defined broadly). The Federal Deposit Insurance Corp. (FDIC) will issue rules on this part of Dodd-Frank.
Dear All,
I’m grateful to the suggested uplifting of the SMEs from auditor’s attestation.
I however contend that these SMEs will enventually grow into bigger organisations. The concern here is that the SMEs should grow up while observing the ethical climate and manage risks ahead of their organisational growth lets they devulge into non compliance of yard sticks of good corporate governance and standards of financial reporting.The question is “who should manage the financial reporting,disclosures and provide assurances on the state of affairs of the SME’s? Must it banks,and other financial agencies? I also dont think their boards are capable of witnessing proper corporate governance for a family business that qualifies for audit attestation excemption. I will be glad to be educated more on this matter.
Richard Gudoi Gid’Agui (rgudoi@yahoo.com)
MSc.Audit,MBA,CIA,CFE,CFSA