Financial Reform Addresses Executive Compensation and Corporate Governance

In response to the severe and prolonged recession, a major financial crisis, the near collapse of our banking system, and increased corporate and financial scrutiny by regulators and the public, both houses of Congress have undertaken the ambitious goal of sweeping financial reform. On December 12, 2009, the U.S. House of Representatives passed the Wall Street Reform and Consumer Protection Act of 2009, and on May 20, 2010, the U.S. Senate passed the Restoring American Financial Stability Act of 2010.

Among other objectives, the bills focus on systemic regulation, creation of a financial stability oversight council, enhanced resolution authority, and increased regulation. In addition, because of the perceived link between increased systemic risk and excessive and poorly designed executive compensation programs, both bills also contain significant changes to executive compensation and corporate governance that would, if enacted, directly and significantly affect executives, directors, companies, and shareholders, and continue the federalization of corporate governance that largely began with Sarbanes-Oxley. In addition to new disclosure requirements, the legislation would impose on public companies significant new substantive and procedural executive compensation requirements. We discuss below some of the key provisions that affect all listed companies, as well as provisions relating solely to financial institutions.

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