Although we likely will not know the entire composition of the House-Senate Conference Committee that will reconcile the Senate and House versions of a financial reform bill for another week, we do know that Rep. Barney Frank will head the Committee (as noted in the NY Times’ DealBook) and we do know the twelve Senators that will be included in that Committee (as noted in this Reuters article; this Reuters article identifies likely House members of the Committee even though they won’t be officially named til week of June 7th). Congress – and President Obama – have a goal to wrap up a final bill by the 4th of July recess.
Even though the House’s bill was weaker in the governance area, it is likely that Rep. Frank will push to keep the stronger Senate provisions in the final bill – with some tweaks as noted below – given that very few of the 400-plus proposed amendments to the Dodd bill dealt with governance issues. The real reconciliation debate will center on how financial institutions are regulated (ie. derivatives, “too big to fail”, etc. – see Frank’s comments in these areas yesterday).
Note that Barney Frank wants the Conference Committee negotiations televised.
Barney Frank Speaks: His View of Which Governance Provisions Will Survive Reconciliation
According to this article, Rep. Frank said last week that the specific language regarding the proxy access provision was up in the air. He also said that the Senate provision for a self-funded SEC may be tweaked to keep Congress involved somewhat – and he indicated that the House provision to exempt smaller companies from SOX’s internal controls requirement may survive. According to the ISS Blog, Frank said that the Senate’s majority vote requirement could well be stripped out in the final bill.
Below is a piece written by CongressDaily’s Bill Swindell entitled “Frank Sees SEC Self-Funding Language As Ripe for Revision” that covers a number of topics:
A drive to allow the SEC to self-fund its budget by retaining fees it collects will likely have to be modified to allow for greater oversight by appropriators, House Financial Services Chairman Barney Frank said Tuesday. Frank said conference negotiators on legislation to revamp the nation’s financial regulatory system will have to take into account the resistance of appropriators to SEC self-funding because they would lose their power to dictate its budget.
“The Appropriations Committee gets very upset about this. What I am hoping that gets worked out, and it will be with their participation, is a way to do some self-funding, which leaves the Appropriations Committee with a role,” Frank said during a talk at the Compliance Week annual conference. The Senate bill contains the provision, allowing the agency’s chairman to submit a budget to the SEC, but it would automatically get the amount requested. The language was sponsored by Sen. Charles Schumer, D-N.Y., who has argued the agency needs more resources to monitor wrongdoing in the aftermath of the Bernard Madoff and Allen Stanford fraud cases. The House bill set an increase in authorization levels.
The FY10 funding for the SEC was $1.1 billion, a $151 million increase over FY09. It has requested $1.26 billion for FY11. The agency collected $1.5 billion in fees in 2008. “The appropriators are going to push hard to maintain some role, and I think they will be successful,” Frank said. Both bills give the SEC authority to issue rules that would allow shareholders to nominate board of director candidates through increased proxy access. “I think we are at least going to empower the SEC to do it. Beyond that, I’m not sure,” Frank said.
The SEC last year proposed a rule to require companies in some cases to include in their proxy materials the nominations for directors by shareholders, but held off on finalizing the proposal. The U.S. Chamber of Commerce and other business groups question whether the agency has the right to issue rules over corporate governance standards that are enacted at the state level.
The Senate bill, however, includes additional Schumer provisions, such as requiring that directors in uncontested elections receive a majority of the votes cast, or they must tender their resignation. It also would require the SEC to issue rules to require public companies in their proxy statements to disclose why the same or different people serve as chairman and CEO. Frank said he did not know if the additional Schumer provisions could withstand negotiations, though they are a priority for the New Yorker.
Frank expressed some skepticism for a drive to separate the CEO and chairman duties. “In my experience, it hasn’t made a lot of difference if you have looked at the performance, of separating the CEO from the chairman of the board. People say it’s very important. But my guess is that if you threw up the list of major companies, and didn’t tell people which was which, there wouldn’t be [a] way to differentiate by any kind of results and analysis,” he said.
The Senate appointed its conferees Tuesday, with a 7-5 ratio of Democrats to Republicans. Frank said the House will appoint its conferees the week of June 7, and he recommended a party-line ratio of eight to five. “We have an administration that feels strongly about this, and I expect House leadership will be engaged more than they were last year when health care took up much of their time and when they paid us the compliment of trusting us,” Frank wrote to Democratic members of his panel.
“Their greater involvement will not imply a lack of trust, but simply the fact we are down to a very few important issues where the administration will be strongly expressing its view,” he continued. “There is also the fact that the need to keep 60 votes in the Senate will be something of a constraint.”
Yesterday, the final version of the Senate’s Dodd bill – the “Restoring American Financial Stability Act of 2010” – was made publicly available. At 1,615 pages, it will take quite some time to print (and read!).
If you’re interested in just the corporate governance and executive compensation portions of the RAFSA, check out this 23-page excerpt courtesy of Davis Polk. Of course, we continue to post memos analyzing the bill in our “Regulatory Reform” Practice Area (here is a 8-pager with a nice side-by-side comparison of the House and Senate bills).
As noted in the ISS Blog, KeyCorp became the third company to fail to obtain majority support for its executive pay package at its annual meeting last Friday. The pay package received only 45% support – it received 87% support last year. Here’s the company’s Form 8-K with the voting results.
So KeyCorp joins Motorola and Occidental Petroleum as the first three US companies whose management say-on-pay ballot items didn’t pass. Wow.
Consider the magnitude of this development:
– These three companies are not Wall Street banks where the general public is angry over banker bonuses.
– There were no organized campaigns against the pay packages at these three companies. This was a pure grass roots movement. With organized campaigns, imagine the level of votes.
– Only a few hundred companies have say-on-pay on their ballot this year; a small fraction of the 10,000 that will have it on their ballot next year when Congress makes it mandatory.
– If the Senate provision remains in the final bill changing NYSE Rule 452, say-on-pay will become a “nonroutine” agenda item – and broker nonvotes won’t be available to be cast in favor of pay packages. This means it will become harder to obtain majority support for executive pay packages.
Among the 40-plus panels at the Conferences, we have tailored a special track to help you prepare for mandatory say-on-pay including these panels:
– “Say-on-Pay: The Proxy Solicitors Speak”
– “Say-on-Pay: Successfully Communicating Externally and Internally”
– “The Proxy Advisors & Investors Speak: Their Hot Button Issues and Say-on-Pay”
– “The New Compensation Legislation: What to Do About Say-on-Pay and More”
– “Five Hot Button Compensation Fixes: In Light of Say-on-Pay and More”
– “This Coming Year’s Grants: How to Deal with Last Year’s Inadvertent Gains”
– “The Big Roundtable: Consultants, Directors and Top HR Heads”
– “Directors Speak Their Minds on Executive Compensation”
With Conference registrations going strong – on track to reach nearly 2000 attendees – you don’t want to be caught unprepared as we head into next year. Last year’s Conference sold out a month in advance – and that was without the reality of mandatory say-on-pay hanging over our heads.
Act Now: You have two choices – either attend the “18th Annual NASPP Conference” in Chicago (which includes the ability to attend the “7th Annual Executive Compensation Conference” – or attend the “7th Annual Executive Compensation Conference” by video webcast (which includes the “5th Annual Proxy Disclosure Conference”).
Below is something I blogged recently on The Corporate Library’s Blog:
While the growth of clawback provisions, according to our latest research, continues, there is no sign of any company willingness actually to implement such provisions. This leaves it to lawsuits such as that at Goldman Sachs, and the SEC’s action against Bank of America regarding the Merrill Lynch bonuses, to prosecute companies, rather than executives. It is clear that making companies pay for mistakes eventually makes shareholders pay for the mistakes they have had to suffer rather than be responsible for.
That is the glory of the clawback, it takes money back from executives who have earned it fraudulently either because of sins of commission or sins of omission. That money goes back to the company and eventually back to shareholders. It holds the individuals responsible for fraudulent actions or ensures that they do not profit from such actions whether responsible or not.
So what the heck? Surely this was all someone’s fault for starters? Or if it wasn’t someone’s fault – which I find impossible to believe – certain individuals have profited enormously from inflated earnings and revenues that were based on chimera.
Ah, well, you see, these clawback provision johnnies, they’re awfully new, you know, and we never had them when all this bad stuff was going on.
Yeah. Clawbacks are new. But morality and business ethics go back a ways.
A data set of all the companies with a clawback provision is also available alongside the research, so you can see exactly whose feet you can hold to the fire when it comes to payback time… in the future.
Even though the Senate has not yet made available the final Dodd bill – reflecting the various amendments adopted during the last few weeks of Senate floor debate – and the final bill is not expected to be released for several days, we have begun posting memos from firms in our “Regulatory Reform” Practice Area. These firms have written their memos based on an assessment of where the bill ended up…
Note that the final tally of proposed amendments exceeded 430 – an average of 4.3 per Senator!
Yesterday afternoon, the US Senate passed a motion for cloture by a vote of 60-40 after failing to get a majority for this motion on Wednesday. Then, the Senate didn’t take advantage of the limited 30 hours of debate that cloture provides – instead it cleared a handful of procedural hurdles and passed the Dodd bill itself (the final bill is not yet available; I will blog when its posted; here’s the rollcall on how each Senator voted).
After several weeks of debate, the U.S. Senate voted 59-39 this evening to approve Senator Christopher Dodd’s wide-ranging financial reform legislation. The vote was largely along party lines, but four Republicans voted for the bill.
The final text was not immediately available, but the version of the bill brought to the floor included provisions to require majority voting in board elections and annual shareholder votes on executive compensation. The bill also affirmed the authority of the SEC to issue a proxy access rule.
The legislation will have to be reconciled with a narrower reform bill that the House of Representatives approved in December. That bill includes an advisory vote mandate and a proxy access provision, but not majority voting. A joint House-Senate conference likely will be held in June, and Democratic leaders hope to have a compromise bill ready for President Obama to sign by the July 4 holiday.
And more information from this excerpt of a WSJ article (see bottom of this article for bullets about where the Senate and House bills differ):
Sen. Gregg was one of 37 Republicans to vote against the 1,500-page bill. But the legislation ultimately passed with a narrow bipartisan majority. Four Republicans joined with 53 Democrats and the Senate’s two independents in support of the package. Two Democrats voted against the bill, and two senators weren’t present for the vote.
Now Congress will need to reconcile the Senate bill with a companion House package adopted in December on a 223-202 vote, with 27 Democrats joining unanimous Republican opposition.
The outlines of the two bills are largely the same. But there are more than a dozen notable differences that will need to be reconciled during negotiations that are expected to start within days. Despite the differences, the Senate passage virtually ensures that some type of financial regulatory reform will be finalized by this summer.
Leading the negotiations will be House Financial Services Chairman Barney Frank (D., Mass.), who has said he would like to have a compromise package by the end of June.
In this podcast, Greg Ruel of The Corporate Library discusses his recent report regarding the largest severance payments given to short-tenured CEOs, including:
– Why did you decide to conduct the severance payment study?
– What were the study’s major findings?
– Did the findings surprise you? Did most of the companies with high severance payments to short-tenured CEOs have low ratings overall?
Recently, our firm released this memo, discussing these ten items that should be on top of the compensation committee’s agenda this year:
1. Revisit Your Executive Compensation Strategy and Philosophy
2. Address Possible “Red Flag” Compensation Practices
3. Validate and, Where Needed, Strengthen Pay-for-Performance Relationships
4. Expand Assessment of Compensation-Related Risk
5. Review Long-Term Incentive Program Design
6. Adopt an Enforceable Clawback Policy
7. Reconsider the Need for Employment Contracts and Severance Agreements
8. Improve Proxy Disclosure in Preparation for “Say on Pay”
9. Create a More Rigorous CEO Evaluation Process
10. Evaluate the Adequacy and Independence of Compensation Advice
Join us tomorrow for the webcast – “Smaller Company Proxy Disclosures: The Latest Developments” – to hear Mark Borges of Compensia and Dave Lynn of CompensationStandards.com and Morrison & Foerster discuss the expectations of what smaller reporting companies should be disclosing regarding executive compensation practices, which has radically changed over the past few years.
Kenneth Feinberg, the paymaster at companies rescued by the U.S. Treasury, recently cut cash compensation for executives at American International Group Inc. and General Motors Co. He said some companies are buying into his credo of pay tied to performance.
Pay expert Graef Crystal, a former adviser to Coca-Cola Co. and American Express Co., has concluded that pay for performance is a fiction. In a study for Bloomberg News, Crystal examined the compensation of 271 chief executive officers and found the average slipped 4.7 percent last year to $9.95 million, with extremes ranging from $43.2 million for CBS Corp.’s Leslie Moonves to $245,322 for Google Inc.’s Eric Schmidt.
Using formulas he developed over 30 years in the business, Crystal crunched the numbers to see whether higher shareholder returns, the gold standard of performance for investors, led to higher pay, and vice versa. No matter how he sliced the data, the answer was no.