Executive Compensation Alert Inside New Legislative and Regulatory Proposals Overview Shareholder Bill of Rights Act of 2009 Approval of Executive Compensation Disclosure Approval of Golden Parachutes Input on Board Elections Corporate Governance Standards Potential New SEC Disclosure Rules Equity Pay Disclosed at Fair Value Risk Disclosures Enhanced Benchmarking Disclosures Alert 2009-04 New Legislative and Regulatory Proposals on Executive Compensation A recent flurry of activity suggests Congress is ready to consider additional and sweeping legislative proposals on executive compensation and corporate governance matters. Unlike the financial bailout legislation which imposed certain restrictions on executive compensation paid by financial institutions participating in TARP, current legislative proposals would apply to all public companies. To add to the mix, the Securities and Exchange Commission (SEC) also may be contemplating significant changes to proxy disclosure rules on executive compensation. Shareholder Bill of Rights Act of 2009 Senator Charles Schumer (D. NY) is preparing to introduce legislation on executive compensation and corporate governance, entitled the Shareholder Bill of Rights Act of 2009 (the Schumer Bill ). The Schumer Bill provides for the following: Annual Shareholder Approval of Executive Compensation Disclosure. A public company must grant shareholders a nonbinding advisory vote on its executive compensation proxy disclosure (which includes the compensation discussion and analysis, compensation tables, and related material). The nonbinding shareholder vote may not be construed to overrule a decision by the company s board of directors, to create or imply any additional fiduciary duty on such board, or to restrict or limit the ability of shareholders to make proxy proposals related to executive compensation. If the Schumer Bill is enacted, annual shareholder approval of executive pay disclosures would be effective for pay disclosures occurring after the first anniversary of enactment (2011 proxy statements for most U.S. public companies). Shareholder Approval of Golden Parachutes. A public company must grant shareholders a nonbinding advisory vote on golden parachute arrangements that have not been previously subject to a shareholder vote (i.e., the annual shareholder vote described above). Golden parachute arrangements refer to any agreements or understandings under which an executive officer would be paid any type of compensation (whether present, deferred, or contingent) that is based on or is otherwise related to the acquisition, merger, consolidation, sale, or other disposition of the officer s employer. Typically, the shareholder vote requirement would be implicated in those relatively rare circumstances where change-in-control severance arrangements are entered into contemporaneously with a change-in-control transaction or in anticipation of a change-in-control transaction. Pay Disclosures Beyond NEOs Copyright 2009 Aon Hewitt 1 May 15, 2009 / Alert
The nonbinding shareholder vote also may not be construed to overrule a decision by the company s board of directors, to create or imply any change to the current fiduciary duties of such board, to create or imply any additional fiduciary duty on such board, or to restrict or limit the ability of shareholders to make proxy proposals related to executive compensation. If the Schumer Bill is enacted, shareholder approval of golden parachutes would be effective for proxy disclosures occurring after the first anniversary of enactment. Shareholder Input in Board Elections. A public company s shareholders must be granted access to proxy solicitation materials for purposes of nominating company directors, provided the shareholders satisfy certain ownership requirements. To gain proxy access, a company s shareholder or group of shareholders acting by agreement must beneficially own, in the aggregate, not less than 1 percent of the voting securities of the company for at least the two-year period preceding the date of the company s next scheduled annual meeting. The Schumer Bill directs the SEC to establish rules relating to the use by shareholders of proxy solicitation materials for the foregoing purpose. Corporate Governance Standards (Mandated Exchange Listing Standards). The SEC is directed to require the national securities exchanges and national securities associations to prohibit the listing of any securities of a company that is not in compliance with any of the following requirements: Director independence (separation of CEO and chair roles). A listed company s CEO may not also serve as the company s chairman of the board of directors. A listed company s board chairman must meet the independence rules of the applicable exchange and may not have previously served as an executive officer of the company. Annual elections of directors (abolishment of classified boards). A listed company may not maintain a classified board. A listed company s directors must stand for election each year. However, directors are not subject to any maximum period of service or limits on the terms of service. Copyright 2009 Aon Hewitt 2 May 15, 2009 / Alert
Rules on director elections. Elections of directors are subject to the following rules: Uncontested elections: To be elected in an uncontested election, a director must receive a majority of votes cast. If a director is not elected to a new term in an uncontested election, the director is required to tender his or her resignation to the board of directors and the board is required to accept the resignation. The board is empowered to set the date on which such resignation is effective pursuant to rules to be issued by the SEC. The effective date of the resignation must be made public within a reasonable period of time. Contested elections: To be elected in a contested election where the number of nominees exceeds the number of directors to be elected, a director must receive a plurality of the votes cast by shares represented at the applicable shareholder meeting and entitled to vote. Establishment of a risk committee. A listed company must establish a risk committee composed entirely of independent directors within one year after the date of issuance of final rules issued by the SEC. The risk committee will be responsible for the establishment and evaluation of the risk management practices of the listed company. If the Schumer Bill is enacted in its current form, the SEC must issue final rules regarding the establishment of risk committees within one year after enactment. Effective dates and opportunity to comply and cure. The SEC has up to one year from the enactment of the Schumer Bill to direct the national securities exchanges and national securities associations to prohibit the listing of companies that are not in compliance with the corporate governance standards. In addition, the SEC is directed to issue rules under which a noncompliant company would have the opportunity to come into compliance with the corporate governance requirements and to cure any defects prior to de-listing. The SEC may also issue rules exempting certain public entities from the corporate governance requirements. Aon Hewitt Comment. The most surprising aspect of the Schumer Bill is the delisting requirement for exchange-listed public companies that do not comply with the enumerated corporate governance requirements. Undoubtedly, that aspect of the Schumer Bill will come under fierce attack by many elements of the business community. Ultimately, the de-listing requirement may prove to be a bargaining chip used in exchange for a compromise bill. Copyright 2009 Aon Hewitt 3 May 15, 2009 / Alert
The substantive aspects of the Schumer Bill also contain a few surprises. The shareholder approval requirement of executive compensation disclosures comes as no surprise and virtually mirrors the requirement applicable to TARP-funded financial institutions. In contrast, the breadth of the corporate governance standards is surprising and is virtually a shareholder activist s wish list. This includes separation of the Chairman and CEO role. While this is a majority practice in many countries, it remains a clear minority practice in the U.S. and, therefore, will be hotly debated. A new wrinkle introduced by these standards is the requirement for a listed company to establish a board level risk committee which would be responsible for the evaluation of corporate-wide risk management practices. This goes far beyond the requirements under ARRA which limits a Board s risk assessment responsibilities to executive compensation programs. SEC Considering Changes to Executive Pay Disclosure Rules The Associated Press reported on May 1, 2009 that SEC Chairman Mary Schapiro is rethinking the agency's compensation disclosure requirements. The report suggests that the SEC may require the disclosure of the grant date fair value of equity pay in a public company s summary compensation table (SCT), as was originally the case when the new proxy disclosure rules were first issued. Presently, the SCT discloses the annual accounting charge associated with outstanding equity grants (the grant date fair value of equity grants is found in a secondary table to the SCT). The Associated Press further reported that Chairman Schapiro is considering other changes to the executive compensation disclosure rules, including: Specified risk disclosures. Public companies may be required to provide greater detail as to how their boards manages risk, ranging from financial issues to climate change, and how risk affects the setting of compensation. Chairman Schapiro noted that "Shareholders generally deserve greater clarity about how compensation plans have been designed, how they relate to risk taking and how they relate to longer-term performance. Enhanced benchmarking disclosures. Public companies may be required to bolster disclosures relating to compensation benchmarking including disclosures of how companies' pay practices compare to those of competitors. Expanded disclosures beyond named executive officers (NEOs). Public companies may be required to disclose how they pay employees outside the proxy-disclosed NEOs. Although such disclosure would not name individuals beyond the NEOs, companies may be required to reveal more about the structure of their bonus programs for the broader workforce. Copyright 2009 Aon Hewitt 4 May 15, 2009 / Alert
Aon Hewitt Comment. The SEC is likely to engage in significant rule making on executive compensation disclosures some time this summer. The items discussed by Chairman Schapiro may prove to be just the tip of the iceberg. At a minimum, mandated disclosures on risk assessment and risk management seem likely to be enacted. Given the continuing interest in this area, companies would be prudent to develop and implement methods for assessing and managing excessive risk in connection with their pay arrangements. * * * * * The Executive Compensation Alert is prepared by Aon Hewitt s Executive Compensation Center of Technical Expertise led by Dave Sugar. Questions regarding executive compensation technical issues may be directed to Dave Sugar at 847-295-5000 or dave.sugar@aonhewitt.com. This report is a publication of Aon Hewitt, provides general information for reference purposes only, and should not be construed as legal or accounting advice or a legal or accounting opinion on any specific fact circumstances. The information provided here should be reviewed with appropriate advisors concerning your own situation and any specific questions you may have. http://www.aonhewitt.com Copyright 2009 Aon Hewitt 5 May 15, 2009 / Alert