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The Dodd-Frank Act and Major Corporate Governance Reform

Dodd-Frank Represents a Significant Change in Corporate Governance and Compliance Reform.

(March 29, 2010):  Chairman of the Senate Banking Committee, Senator Chris Dodd (D-Conn.) is flaunting  his “regulatory reform” bill, the Restoring American Financial Stability Act of 2010 (also called the Dodd-Frank Act), as a bi-partisan effort with Senate Republicans and Committee Ranking Members. Senator Dodd stated on March 11, 2010: “I have been fortunate to have a strong partner in Senator Corker, and my new proposal will reflect his input and the good work done by many of our colleagues as well.” The Dodd-Frank Act draft bill, over 1,000 pages long, is primarily aimed at regulating financial institutions and their products.  Under the bill, the Federal Reserve would gain new powers over non-bank financial firms and keep much of its authority over banks.  However, it also includes several corporate governance and executive compensation provisions that would apply to all public companies.

I.  Major Dodd-Frank Act Corporate Governance Provisions:

The Dodd-Frank Act corporate governance provisions would require the following:

  • The SEC would need to adopt rules requiring companies that are subject to the SEC’s proxy rules to include shareholder nominees for the board in the company’s proxy statement on terms determined by the SEC.
  • Companies listed on securities exchanges would be required to adopt a majority voting standard in uncontested elections. Any directors that do not receive a majority vote would be required to resign. The board must accept the resignation or vote unanimously to reject it and disclose the reasons for the rejection.
  • Companies listed on securities exchanges would be prohibited from having a staggered board unless approved by shareholders.
  • Companies would be required to disclose in their annual proxy statements the reasons they have chosen to either have a single CEO and chairman or have separated the CEO and chairman positions.

II.  Dodd-Frank’s Executive Compensation Provisions:

The executive compensation provisions would require the following:

  • Companies subject to the SEC’s proxy rules would be required to have an annual advisory vote on executive compensation and golden parachutes.
  • Companies would be required to include proxy disclosure of the relationship between executive compensation and financial performance, and a pictorial comparison of the amount of executive compensation and the company’s financial performance over the preceding five years.
  • Compensation committee members of companies listed on securities exchanges would need to satisfy independence standards established by the national securities exchanges. In addition, the SEC would be required to adopt rules ensuring that any compensation consultant, legal counsel, or other advisor to the compensation committee was “independent” (as defined by the SEC).
  • Companies would need to develop and implement a clawback policy that would require recovery of all incentive-based compensation from all executive officers (both current and former) in the event of a financial restatement, for the three-year period preceding the restatement in excess of what they would have been paid under the restatement.
  • Companies would be required to disclose whether their employees are permitted to engage in hedging activities that are designed to hedge or offset market declines affecting compensatory equity awards.

The Dodd-Frank Act, if passed, would significantly alter the landscape for executive and corporate compensation.

Health Care AttorneyDavid Parker serves as Managing Partner at Liles Parker, Attorneys & Counselors at Law.  A number of Liles Parker attorneys have extensive experience representing corporate clients in compliance matters.  For more information on this or other corporate issue, please give David a call at 1 (800) 475-1906.

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