“Say on Pay” Votes to Become Mandatory Under Obama Administration Proposal

On June 17, President Barack Obama proposed broad changes to the manner in which the U.S. government supervises financial markets. Among the numerous elements of the administration's plan is a requirement that public companies implement "say on pay" rules, under which they would submit executive compensation packages to a nonbinding vote of their shareholders.

The brief description contained in the plan suggests that the "say on pay" requirement would extend to all public companies, regardless of size, though details of the proposal and the timing of any eventual adoption have not yet been announced. It is not yet clear whether the votes would be required annually or on some other regular basis, or only be required following material changes to a compensation structure that has previously been subject to a vote. The votes would be nonbinding, but the plan posits that they would "provide a strong message to management and boards and serve to support a culture of performance, transparency, and accountability in executive compensation." The Obama administration also believes that "say on pay" rules "could help restore investor trust by promoting increased shareholder participation and increasing accountability of board members and corporate management."

The Obama administration's plan is only the latest example of a current federal focus on executive compensation. In a June 10 statement, Securities and Exchange Commission (SEC) Chairman Mary Schapiro expressed SEC concerns regarding executive compensation, saying "I firmly believe that better disclosure of compensation leads to more informed shareholders and in turn to more accountable corporate directors. This is the foundation of our capital markets." She indicated that the SEC will be considering proposals mandating disclosure of the following:

• How a company and its board manage risk

• A company's overall compensation approach, with particular attention given to incentive structures that might reward short-term risk taking without regard for potential long-term effects on the company

• Potential conflicts of interest affecting compensation consultants retained by companies, including disclosure of relationships between the consultants and the company and their affiliates

The SEC is also focused on company boards of directors. Ms. Schapiro's June 10 statement suggested that the SEC will be requiring further disclosure of information regarding director nominees, including their experience and qualifications to serve on the board or on particular board committees, and an explanation as to why a board has chosen its particular leadership structure. The SEC's focus on board issues was also demonstrated in its May 2009 proposal of rules designed to better facilitate shareholder nominations of director candidates.

In addition to the Obama administration's plan and the SEC rulemaking initiatives, the Treasury Department recently published its interim final rule containing TARP-related standards on compensation and corporate governance matters.

As more information regarding all of these initiatives becomes available, Morgan Lewis will provide additional information and guidance on these issues.

If you have any questions regarding any of the issues discussed in this LawFlash, please contact any of the following Morgan Lewis attorneys:

Philadelphia
Justin W. Chairman
James W. McKenzie, Jr.
Alan Singer
Joanne R. Soslow

New York
Stephen P. Farrell
John T. Hood
Thomas P. Giblin, Jr.
Christopher T. Jensen
Howard A. Kenny
Finnbarr D. Murphy
David W. Pollak

Los Angeles
Ingrid A. Myers

Palo Alto
Thomas W. Kellerman
S. James DiBernardo

Pittsburgh
Kimberly A. Taylor

Princeton
Emilio Ragosa

Washington<, D.C.
Linda L. Griggs
David A. Sirignano
George G. Yearsich
Daniel L. Hogans
Benjamin I. Delancy