On January 16, the SEC approved the new NYSE and NASDAQ listing standards relating to compensation committee independence. As noted in the NASPP’s alert on the original proposals (“Exchanges Issue New Standards for Compensation Committee Independence“), the new standards include three primary requirements:
The compensation committee must be comprised of independent directors, based on a number of “bright line” tests (many of which were already applicable to independent directors under each exchange’s prior listing standards) as well as additional factors that the SEC suggested should be considered in determining a director’s independence. Also, NASDAQ will now require a separate compensation committee (the NYSE already required this).
The compensation committee must have authority and funding to retain compensation advisors and must be directly responsible for appointment, compensation, and oversight of any advisors to the committee.
The committee must evaluate the independence of any advisors (compensation consultants, legal advisors, etc.).
The final rules make only a few minor changes to the original proposals, including clarifying that the compensation committee will not be required to conduct the required independence assessment as to a compensation adviser that acts in a role limited to:
consulting on a broad-based plan that does not discriminate in favor of executive officers or directors of the company, and that is available generally to all salaried employees; or
providing information (such as survey data) that is not customized for a particular company or that is customized based on parameters that are not developed by the adviser, and about which the adviser does not provide advice.
Public companies now need to assess whether the compensation consultants and other advisors engaged by their compensation committee raise any conflicts of interest and disclose any identified conflicts in their proxy statement (for annual meetings after January 1, 2013 at which directors will be elected). Although not required, where no conflict of interest is found, we expect that many companies will include a disclosure to indicate this.
In his Proxy Disclosure Blog on CompensationStandards.com, Mark Borges of Compensia highlights a recent disclosure on this topic in Viacom’s proxy statement, which might be useful to review as you draft your own disclosure (if this isn’t your gig, perhaps you can score some points by forwarding it on to the person that will be drafting this disclosure).
Last week, the SEC issued final rules requiring US exchanges to adopt listing standards on the independence of compensation committee members and the use of compensation advisors by said committees.
I don’t have a lot to say about these rules because they don’t directly relate to stock compensation. Sure, the compensation committee typically has authority over the company’s stock plans and changing who sits on the committee and which advisors the committee relies on could have implications for the company’s stock plan, but there’s nothing specific to stock compensation in the rules. And, let’s face it, for purposes of this blog, there are only two categories of stuff: 1) Stock compensation and things that explicity impact it and 2) Things I don’t care about. But, despite that fact that the new rules seem to fall into category #2, it is a current development that, at least peripherally impacts our world, so I figured a blog entry might be in order.
Rules to Create Rules
The final rules issued by the SEC are 124 pages (and no, I haven’t read them all–see #2 above–but I did read a nifty summary by Morrison & Foerster). What strikes me is that here we have 124 pages of rules, but these aren’t actually the real rules yet. These rules just direct the exchanges (Nasdaq, NYSE) to adopt the rules. They don’t even tell Nasdaq and the NYSE what the rules should be, they just suggest things that should be considered in creating the rules. The exchanges now have around 90 days to propose the actual rules, which presumably will be subject to comment (although the SEC rules were already subject to comment) and then eventually the actual, final rules will be adopted. Just an observation, not a criticism of the SEC–they are just doing what they were instructed to do under Dodd-Frank.
Three Independence Standards
The rules require the exchanges to adopt rules requiring compensation committee members to be independent, taking into consideration sources of compensation paid to directors and any relationships directors have with the company or its officers. If you’re thinking that this sounds familiar, you’re right. For purposes of Section 16, most companies maintain a committee of two or more “nonemployee” directors and for purposes of Section 162(m), companies also ensure that the members of that committee are “outside” directors. Now the committee members will also have to be “independent” under the listing standards the exchanges adopt. My guess is that they aren’t going to just adopt the Section 16 or 162(m) definition (which are similar to each other but just different enough to be confusing) and that we’ll have a third standard to comply with.
Compensation Advisors
The rules also stipulate that the exchange listing standards require that compensation committees have sole authority to engage advisors (compensation consultants and/or attorneys) and that company provide funding to the committee to pay the advisors. The rules specify a number of independence factors that the exchanges are to direct compensation committees to consider when engaging advisors. The rules don’t preclude the committee from receiving advise from non-independent counsel or consultants (e.g., the company’s in-house or outside legal counsel).
Compensation committee reliance on independent advisors has been a best practice for many years now; I suspect that many companies already have practices that partially or fully comply with this requirement. Even so, given that the advisors your compensation committee hires are likely to be making recommendations on stock compensation issued to executives, it’s something to be aware of. See topics #1 and #2 in our recent webcast “Ten Equity Compensation Issues That Affect All Stock Plan Professionals (That No One Told You About).”
Disclosures
The final rules also update the disclosures companies are required to make with respect to compensation consultants, expanding the factors that must be considered in evaluating the independence of the consultants.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so we keep an ongoing “to do” list for you here in our blog.
The Obama Administration’s regulatory reform agenda has been moving forward. Recently, the SEC proposed changes to proxy disclosure and solicitation requirements and the Treasury issued its Interim Final Rule consolidating restrictions for TARP fund recipients. Last week I mentioned that all companies should be keeping an eye on the TARP fund recipient requirements, as the government is likely to push at least part of these requirements to all companies.
Well, last Thursday, the Treasury issued proposed legislation, the Investor Protection Act of 2009, which requires a non-binding shareholder vote on executive compensation as well as provides for truly independent compensation committees.
For proxies or shareholder meetings on or after December 15, 2009, the proposed legislation requires that a separate, non-binding shareholder vote be cast to approve the executive compensation as it is disclosed in the proxy statement.
Shareholder Approval of Golden Parachute Payments
The Treasury’s proposal also includes a requirement that any proxy or solicitation material on corporate transactions (acquisitions, mergers, etc.) include in tabular format any executive compensation relating to the corporate transaction, including the aggregate total of that compensation. Additionally, it calls for a separate, non-binding shareholder vote on executive compensation relating to the corporate transaction.
Under the proposal, compensation committee members must remain truly independent, other than their involvement in the company as non-employee directors (with potential exemptions for smaller reporting issuers). To be considered independent, members of the compensation committee may not accept any fees from the company for any activity other than their involvement in the board of directors, compensation committee, or other board committee. The SEC will direct national securities exchanges to include these enhanced independence criteria in listing requirements and may direct exchanges to prohibit the listing of the securities of companies found to not be in compliance.
Compensation Consultants and Independent Legal Counsel
The Treasury feels that the involvement of compensation consultants puts compensation committees at a disadvantage, encouraging them to approve excessive compensation for CEOs and other executives. To help level the playing field, the proposed legislation requires that compensation committees be permitted (and provided funding) by the companies to retain their own compensation consultants. These independent consultants would report only to the compensation committee rather than to the company.
Additionally, compensation committees must be permitted (and provided funding) by companies to retain independent legal counsel or other advisors at the discretion of the compensation committees.
Disclosure
In the spirit of greater transparency, the proposed regulations will require companies to disclose whether or not their compensation committees retained a compensation consultant. If a compensation committee chooses not to retain the services of a compensation consultant, the justification for that decision must be disclosed.
This proposal will almost certainly mean that stock plan administrators will find themselves working more closely with compensation consultants. Don’t miss our Conference session “Wagging the Dog: Stock Plan Administrator Meets Compensation Consultant” for ideas on how to be proactive on your involvement in compensation decisions!