The Restoring American Financial Stability Act of 2010, passed by U.S. Senate on May 20th, contains provisions that apply to all public companies. Fortunately, you won’t need to read the daunting almost 1500 pages of the bill to weed out the pieces that could impact stock plan managers because we’ve posted the corporate governance and executive compensation portions, courtesy of Davis Polk. Here are the main sections that I think you should be aware of.
Say on Pay and Majority Voting
This bill, like the corresponding House bill, does include a required non-binding shareholder vote to approve executive compensation. Unlike the House bill, this legislation does not require a shareholder advisory vote on golden parachute payments. This provision would take effect six months after enactment of the bill. This does mean that say on pay for all public companies is eminent. Additionally, there is a provision that requires majority voting by shareholders in uncontested board elections that would require any board member who does not receive a majority vote to submit his or her resignation.
These two provisions mean that companies will need to prepare for the voting process, but also get a game plan together on how to address the possibility that shareholders will reject either uncontested board members or executive compensation. In both scenarios, the company can still choose to do what it wants–the executive compensation vote is non-binding and the board can reject a resignation letter. On that note, the CorporateCounsel.net blog this week covers three companies that are already grappling with how to respond to a shareholder rejection of executive pay packages; Motorola, Occidental Petroleum, and KeyCorp. I’ll definitely be tracking this blog to see how say on pay pans out! If you’re looking for more help with executive compensation, don’t forget that the 7th Annual Executive Compensation Conference is included with your 18th Annual NASPP Conference Registration.
Proxy Disclosures
Although this version of the bill does not require the chairman of the board and the CEO to be separate individuals, it does require companies to disclose the reasons they have chosen to keep these positions separate or combine them. In addition, there are a host of required disclosures regarding the company’s compensation committee and executive compensation. This includes a discussion of the relationship between executive compensation and financial performance as well as how the amount of executive compensation compares to the company’s financial performance or investor-return.
Clawbacks
The bill requires the SEC to direct exchanges to prohibit the listing of any company that does not adopt certain clawback policies. This provision is not included in the House bill. Stock plan managers should pay particular attention to this part of the bill. If it is enacted, you will need to work with your legal team to determine if your grant agreements need to be updated and nail down a policy on how to respond to financial restatements that trigger compensation recovery.
Get Smart
As you know, we’ve rolled out our NASPP Question of the Week. I’m really excited about this new challenge for NASPP members! What you may not know is that if you missed out on our first announcement, you still have the unique and never-to-come-again opportunity to catch up. The first four quiz questions will remain available at the full point value until the second month of our contest. So, don’t feel like you’re starting at a disadvantage–you can still work toward that number one position. Create your screen name and get started now!
-Rachel
Tags: compensation committee, Dodd, executive compensation, financial stability, proxy, Say-on-Pay, shareholder vote
Financial institutions that have been participating in the Troubled Asset Relief Program’s (TARP) Capital Purchase Program (CPP) since its creation under the Emergency Economic Stabilization Act of 2008 (EESA)–which I blogged about back in November–find themselves subject to tighter rules in 2009. We’ve recently seen new rules from the Treasury along with the finalization of the American Recovery and Reinvestment Act of 2009 (ARRA). In this entry, I will break down the top changes from 2009 legislation to-date.
First, there have been two new statements from the U.S. Department of the Treasury:
The first, on January 16, 2008, expands the executive compensation standards of the CPP to additionally require the participating company CEO to:
provide annual certification that the participating company has complied with the executive compensation standards of the CPP; and
certify, within 120 days of the closing date of the Securities Purchase Agreement, that the senior executives’ incentive compensation arrangements do not encourage unnecessary and excessive risks that could threaten the value of the financial institution.
It also requires the company to keep records to substantiate these certifications for at least six years following each certification and provide these records to the TARP Chief Compliance Officer upon request.
The second statement from the Treasury came on February 4, 2009. In this statement, the Treasury distinguishes between banks participating in any generally available capital access program (like the CPP) and banks needing “exceptional assistance.” Companies that receive exceptional assistance (like AIG) will be required to:
limit senior executives to $500,000 in total annual compensation other than restricted stock that may not fully vest until the government has been repaid with interest;
fully disclose the company’s executive compensation structure and strategy and institute a “say on pay” shareholder resolution;
ban golden parachute payments for the top 10 senior executives; and
adopt a policy banning “luxury expenditures”.
Those participating in generally available programs:
have the same limit to total comensation for senior executives, but allows for that limit to be waived by shareholder vote and with a full public disclosure;
require clawback provisions for bonuses paid to top executives who are found to have engaged in deceptive practices;
ban golden parachutes for senior executives that are greater than the value of one year’s compensation (previously, payments of no greater than three years’ compensation were permitted); and
adopt a policy banning “luxury expenditures”.
Then, on February 17, 2009, the American Recovery and Reinvestment Act of 2009 was signed into legislation.
The ARRA standards apply not only to institutions that participate in the TARP going forward, but also retroactively to those who are currently receiving TARP funds. In addition to the provisions of EESA and the recent Treasury rules, the ARRA includes the following additional requirements:
The Treasury Secretary must review all compensation and bonuses paid to the top 25 highest paid individuals to confirm that such payments were neither inconsistent with the executive compensation provisions of the ARRA nor contrary to public interest.
The ARRA limits bonus, retention, and incentive pay for covered employees to the form of restricted stock that does not exceed 1/3 of the individual’s annual compensation and may not fully vest until after the TARP funds have been repaid. The number of employees covered by this limit depends on the amount of TARP funds received by the company.
Participating companies must establish a Board Compensation Committee of independent directors tasked with reviewing employee compensation plans.
The annual certification required by the February 4th Treasury Rule must be included in the company’s annual filing with the SEC.
The claw-back provisions originally under the TARP are expanded under the ARRA to include the top 25 highest paid individuals, requiring the recoupment of any incentive awards that were based on materially inaccurate financial statements or erroneous performance metrics.
However, the ARRA does provide a way for currently participating institutions to exit the TARP. Companies may, with permission from the Treasury Secretary, repay the funds and no longer be subject to the executive compensation standards.
In light of these new rules and the new Act, we have updated our EESA portal. The new and updated Economic Stabilization Legislation portal includes the legislation from the original Emergency Economic Recovery Act of 2008, the new Treasury rules for TARP, and the American Recovery and Reinvestment Act of 2009. Additionally, you will find many helpful memos from top professionals to clarify the latest rules. All of this new legislation is part of the government’s Financial Stability Plan. We have yet to see what the impact will ultimately be to all companies, not just financial institutions or banks participating in the TARP.
-Rachel
Tags: ARRA, CPP, EESA, executive compensation, financial stability, TARP