Governance and legal experts look back at the impact of regulation signed into law 12 months ago today
It’s the first anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Since Congress passed it, IR officers have become painfully aware of how the legislation reaches far beyond financial services companies.
The complex legislation – the Senate’s brief summary runs to 16 pages – included significant requirements in executive compensation and corporate governance for all.
Even with mandatory majority voting for directors having been dropped from early versions of the legislation, the requirements have still been onerous.
‘It could be a 10 percent to 20 percent increase in workload, though not hitting all IROs equally throughout the year,’ says Ron Schneider, senior vice president of proxy solicitation and corporate governance consultancy Phoenix Advisory Partners. ‘And it’s not all done yet. They’re still working on finalizing about half of that ambitious agenda.’
What is in place can be tough enough. ‘The area where it’s created the most work is around the say-on-pay vote,’ says Michael Littenberg, a partner at law firm Schulte Roth & Zabel, who adds that this affects both the first compensation round and the frequency votes.
‘For many companies, the [frequency] vote will be annual. That means executive pay practices are going to be even more front and center for IROs than they have been in the past.’
Although IROs may think that – as with most new regulatory structures – the worst is over after the first year, that may not be the case. According to Littenberg, there are three groups developing among corporations: those that had an overwhelmingly affirmative vote on compensation, those that got passage but with a much lower margin, and those rebuked with a ‘no’.
The last group is tiny. The first is reasonably large and probably safe. It’s the middle group that could feel pain. ‘Fluctuation and increased shareholder activism could see the vote go negative or be on the margin next year,’ Littenberg says.
‘Given executive compensation and some of the massive failures that have occurred, some shareholders think directors are not fully in charge,’ says Sanjay Shirodkar, of counsel to DLA Piper’s public company and corporate governance group and a former special counsel with the SEC. ‘I believe there will be activists who will watch what happens this year and then target companies.’
And then there are the parts not yet in place: direct proxy access is only temporarily at bay because of court action taken by some corporations. Some other potential provisions include independent compensation committees and required clawbacks for compensation based on inaccurate financial statements.
The bigger burden may be an indirect one. Corporations that are nervous about Dodd-Frank and what might come in the future want better communications with investors, and that means IR department involvement. During the year, some companies have done a roadshow or a fifth analyst call just to address compensation issues.
‘And in this environment, you’re asked to do more – but not given more resources to do it,’ Schneider says.
