Friday, July 03, 2009

MarketWatch: SEC OK's proposal to give investors more say on TARP pay

SEC votes to approve new disclosure rule targeting conflict pay consultants

Jul 1, 2009, 5:26 p.m. EST

By Ronald D. Orol, MarketWatch

WASHINGTON (MarketWatch) --The Securities and Exchange Commission on Wednesday voted unanimously to propose a rule giving shareholders a vote on the pay of executives at banks receiving funds from the federal government's bank-bailout program.

The proposal was part of a larger package of governance and disclosure rules under consideration by the agency. Commissioners at the SEC also voted to consider transparency rules to expand disclosure of pay packages and other governance matters.

They also approved, in a split, party-line 3-2 vote, a measure introduced by the New York Stock Exchange that prohibits brokers from casting director-election votes on behalf of investors that don't vote themselves. See full story.

"All three of these measures seek to enhance the quality of the system for each of 800 billion shares voted annually," said SEC Chairwoman Mary Schapiro.

Some institutions that haven't paid back the government money from its Troubled Asset Relief Program and will need to give investors a say on pay include Bank of America (BAC) , Citigroup (C) and other financial firms. J.P. Morgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley, repaid TARP funds, in part, to avoid pay restrictions associated with the program.
TARP say on pay

The say-on-pay proposal would allow shareholders a non-binding vote on the pay packages of executives of financial institutions that have accepted funds as part of TARP.

The corporation is not required to follow the results of the vote, however a substantial vote against executive pay packages is likely to be embarrassing.

Such an approach, which Congress is considering for all U.S. corporations, would likely lead to more behind-the-scenes discussions between management and shareholders about executive pay packages.

Harvard Law School Professor John Coffee said the say-on-pay proposal is a harbinger of things to come because both Congress and the White House have expressed an eagerness to give shareholders of all corporations - not just TARP recipient banks - a say on pay. The House approved say-on-pay legislation in 2007 and lawmakers in both chambers are considering similar legislation.

"Both the House and Senate committees are going to go forward with say on pay," Coffee said. "And the Obama administration backs it as well."

Disclosure proposal

The agency also proposed new disclosure regulations, including a measure that would require corporations or dissident investors to provide more details in proxy disclosure documents about the business experience of director nominees.

Existing rules require only a brief description of the business experience director candidates have over the past five years. The agency will consider whether boards should disclose more details about why they choose a particular leadership structure.

The measure also requires corporations to provide more information about how its pay policies create incentives that impact the firm's risks and how management is controlling that risk. The measure also seeks improved reporting of stock and option awards in a compensation table based on fair value rules, which seeks to provide a more accurate sense of the officials pay at that time.

New disclosures about fees paid to consultants are also required in situations where the advisor or any of its subsidiaries provides other services to the company. The new proposal is intended to enable investors to consider pay decisions and assess any conflicts of interests a consultant may have in recommending pay packages.

Charles Tharp, vice president at the Center on Executive Compensation, said the say-on-pay rule is a step in the right direction, but more needs to be done. He said the SEC should revise its rules about what corporations need to disclose in their compensation tables to separate actual pay earned during the year, including salary and bonuses, from long term incentives.

"The current reporting of pay mixes actual pay with the accounting estimate of restricted stock and stock options that may or may not be earned, depending upon the company's performance in future years," Tharp said. "A clearer understanding of the relationship between pay and performance would benefit shareholders, compensation committees and companies."

Proxy fight disclosure -- an expedited approach

The measure also requires a corporation to disclose the results of an investor vote within four business days after the end of the meeting at which the vote was held. In many cases of contested director elections, when dissident investors nominate their candidates for election against management's slate of directors, corporations often delay release of results of elections for a week or a month after election.

David Sirignano, partner at Morgan Lewis & Bockius LLP in Washington, said that based on existing rules, corporations don't need to reveal to vote counts on disputed director elections and other matters until they release the corporation's next quarterly report.

"If they have a meeting on the first day of the quarter, the results don't have to come out until three months later," Sirignano said.

He said that in some cases it may not be practical to have corporations release the results of a contested director election within four days. He recommended requiring corporations to release the results four days after an outcome to the vote is determined, a process that could take ten days but would be significantly less than three months.

Eric Jackson, president of Ironfire Capital LLC, said Yahoo Inc. took two months to release the voting results for a "just vote no" campaign he launched seeking to oust directors at Yahoo Inc. in 2007. The meeting was in June and the results were released in mid-August.

Ronald D. Orol is a MarketWatch reporter, based in Washington.

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