By: Tracy Levine, Managing Director – Renaissance Executive, President – Advantage Talent Inc.

2011 is the year of Corporate Board Accountability to the shareholders, the SEC and the Courts. This is not the theoretical accountability of the past but hard facts transparent accountability. The Dodd-Frank Wall Street Reform and Consumer Protection Act will come into play in 2011. Most people have heard the saying, “What gets counted, gets done.” In this case, Congress and the SEC are taking this philosophy a little further, “If you don’t record your actions with transparency for the shareholders, then you are done.” Not only is the SEC calling for accountability but Shareholders are suing in greater numbers.

“This law (Dodd-Frank) creates a new, more effective regulatory structure, fills a host of regulatory gaps, brings greater public transparency and market accountability to the financial system and gives investors important protections and greater input into corporate governance.”
SEC Chairman Mary L. Schapiro (http://sec.gov/spotlight/dodd-frank.shtml)

Executive Compensation pay approved by the Board will come under increased scrutiny. Gone is the era where Board Members can rubber stamp compensation packages that are not based on increasing the bottom line or facilitating long-term growth. For example, CEO compensation packages that pay on “return on invested assets” in high sales, low margin companies with almost no invested assets will now come under scrutiny by the shareholders. Board members need to truly understand the Key Performance Indicators (KPI) that are relevant and be able to clearly and concisely explain to the shareholders why certain KPI are appropriate benchmarks.

Section 951 of the Dodd-Frank Act (proposed rule) calls for:

  • Shareholder Approval of Executive Compensation and Golden Parachute Agreements: Shareholders will have the opportunity to give advisory opinions through voting on Executive Compensation. The Board gets to decide whether the shareholder vote is binding or not.
  • Shareholder Approval of the Frequency of Shareholder Votes on Executive Compensation: Starting January 21, 2011, a corporation must allow shareholders an Advisory Vote on Executive Compensation at least once every 3 years. Corporations are required to hold a nonbinding shareholder frequency vote every 6 years to vote on how often the shareholders would like to cast a say-on-pay vote, namely: every year, every other year, or once every three years.
  • Enhanced Disclosure on Executive Compensation: Companies would be required to disclose in the Compensation Discussion and Analysis, whether, and if so, how the companies have considered the results of previous say-on-pay votes.
  • Institutional Investment Manager Reporting of Votes: Investment managers would be required to identify securities voted, describe the executive compensation matters voted on, disclose the number of shares over which the manager held voting power and the number of shares voted, and indicate how the manager voted.

Section 953 of the Dodd-Frank Act (proposed rule) calls for:

  • Disclosing Executive Compensation Relative to the other company Employees: A company must disclose the ratio between the CEO’s total compensation and the median total compensation for all other company employees.

Section 954 of the Dodd-Frank Act (proposed rule) calls for:

  • Boards must address Compensation Claw-back Policies: Prohibits the listing of securities of issuers that have not developed and implemented compensation claw-back policies.

While some of the votes are nonbinding, ignoring the shareholders in the current environment is risky for Board Members. With many Baby Boomers finding themselves in a position of unemployment, underemployment or delayed retirement, they are not in a forgiving mood.

UPDATE:  The new rules take effect April 2011.  See the final rule. (http://sec.gov/rules/final/2011/33-9178.pdf)