Ask the Expert: What will be Dodd-Frank's biggest impact?

Jan 20, 2011
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What will be the biggest change for IROs of US-listed companies in the wake of Dodd-Frank?

NIRI president and CEO Jeff MorganJeff Morgan, president and CEO, NIRI
Dodd-Frank legislation will bring a number of changes that ultimately, in my view, represent opportunities for the profession. Top among them is the opportunity for IROs to be more involved in corporate governance matters. Given their day-to-day interactions with the Street, IR professionals have the ear of their investors. As such, they can bring their unique understanding of their shareholders’ thinking on governance matters to internal dialogues, adding real value as members of their governance teams determine corporate governance strategy.

And their voice can help move companies from a disclosure mind set to more of an engagement environment that will be necessary as shareholders seek to exert more corporate governance influence. This environment might already exist at some companies, but for many organizations it does not.  

Dodd-Frank also drives the related need for a closer working relationship between IROs and their corporate secretaries. If IROs are not already involved, now is the time to take the appropriate governance team members on the road for governance discussions, not just with the portfolio manager, but also with the governance manager responsible for voting shares. An annual visit outside of proxy season is a good start. I also suggest IROs add investor feedback on governance matters as part of their management and board reports to boost their ‘trusted adviser’ status.

Dodd-Frank is about Washington’s desire to bring the investor, corporate management and the board closer together, and add accountability. For IROs not already there, Dodd-Frank provides an opportunity to move closer to the coveted ‘seat at the table’ by simply leveraging previously untapped value.

Jeff Morgan is president and CEO of NIRI, the largest IR association in the world with more than 3,500 members. Before joining NIRI, Morgan was chief operating officer of the Futures Industry Association for nine years.

Photo of Michael LittenbergMichael Littenberg, partner, Schulte Roth & Zabel
In addition to all their other job qualifications, IROs will need to become even more conversant with executive compensation and will increasingly be called upon to help ‘sell’ compensation decisions. This expansion of the IRO’s role is being driven by new substantive and disclosure requirements.

Most significantly, pursuant to Dodd-Frank, US public companies in 2011 will be required to conduct a say-on-pay vote and a related vote on the frequency of the say-on-pay vote. Although advisory in nature, the practical reality is that most companies and their compensation committees will feel compelled to follow the vote in future compensation decisions, making the communications strategy around executive compensation decisions especially important.

Dodd-Frank will also require enhanced executive compensation disclosure, further building upon SEC disclosure initiatives of the last several years. Pursuant to Dodd-Frank, the SEC is obliged to adopt rules requiring issuers to disclose ‘pay versus performance’ in their annual meeting proxy statement. Specifically, issuers will be required to show the relationship between executive compensation and the financial performance of the company. Issuers will also be required to disclose the median annual total compensation of all employees excluding the CEO, and the ratio of the CEO’s compensation to that median.

These developments mean that, as part of their job, IROs will need to be familiar with the details of senior executive compensation, how compensation was determined, why it is appropriate and how it relates to compensation at peer firms. IROs at many companies will play a leading role in not only communicating the compensation story, but also in determining the communications strategy.

Some of the Dodd-Frank action items for IROs for the 2011 proxy season include the following: first, IROs should become more involved in the content of the compensation discussion and analysis, which is often written more from a compliance standpoint than an IR one. Second, the IRO should help to determine and assess potential shareholder and advisory firm concerns around compensation. Third, IROs should help to craft the outreach strategy for important shareholder constituencies.

Michael Littenberg is a partner in the New York office of the international law firm Schulte Roth & Zabel. He has more than 20 years of experience representing public companies in transactions and ongoing disclosure and compliance matters.

Photo of Rob BerickRob Berick, senior managing director, Dix & Eaton
While it is premature to gauge the full impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) on US-listed companies, one thing is for certain: life for these public companies just got a lot more complicated. Most point to the ‘proxy access’ provision, which allows dissident shareholders to put their own items on the actual company proxy rather than self-funding a separate mailing, as the epicenter of this landmark federal statute. I believe, however, that the whistleblower provision will prove to be the biggest change – and challenge – for investor relations officers in the US.

In light of Dodd-Frank, individuals will now be entitled to 10 percent to 30 percent of any financial penalty imposed upon a publicly traded company as a result of their anonymous SEC notification of perceived corporate malfeasance. It is not hard to imagine a scenario in which this financial incentive creates a cottage industry of whistleblowers who seemingly find wrongdoing at every turn.

In any event, investor relations officers will increasingly find themselves in crisis mode as they look to preserve and protect their company’s reputation and their management team’s credibility. The upside for IR professionals in this scenario is that it further heightens the need for them to be fully immersed in their company’s corporate governance and enterprise risk management functions.

Rob Berick is senior managing director at communications consultancy Dix & Eaton and oversees the firm’s investor relations practice. Over his nearly 20-year career, he has developed and executed investor relations programs for companies in a wide range of industries and market-cap sizes.

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