dodd frank executive comp valcon
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Executive Compensation and Risk in the Post-Dodd Frank Environment
Valcon 2011
Stephen M. BainbridgeWilliam D. Warren Distinguished Professor
UCLA School of Law
© Stephen M. Bainbridge 2011 32/24/11
Loose money policy
Crisis Factors
Gov’t pro-home
ownership policy
Risk management failures
Consumer debt
Corporate governance
of Main Street firms
CorporateGovernanceof banks
© Stephen M. Bainbridge 2011 42/24/11
The Compensation Story
Take excess risks
producing non-
sustainable returns
© Stephen M. Bainbridge 2011 6
• Section 952 of Dodd-Frank requires that all members of the Compensation Committee be “independent” (as defined).
• The Compensation Committee must be authorized “in its sole discretion” to:• retain,
• terminate,
• or obtain the advice of its own counsel and/or compensation consultant
• Who must meet specified independence requirements
• Each issuer must provide for appropriate funding, as determined by the Compensation Committee, for payment of reasonable compensation to the chosen consultants and counsel
• Recommendations not binding on board
• No evidence compensation committee independence is positively correlated with firm performance or with improved CEO compensation practices
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Compensation Committees
© Stephen M. Bainbridge 2011 7
New Compensation Disclosures Pay vs. Performance: Clear description of
relationship between executive compensation paid and the company’s financial performance.
Pay Equity DisclosureA. The median of the annual total compensation of
all the company’s employees except the CEO
B. The annual total compensation of the CEO, and
C. The ratio of (A) to (B)
Whether Compensation Committee has retained consultant, whether any conflicts of interest were identified, and if so, how addressed
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© Stephen M. Bainbridge 2011 92/24/11
Dodd-Frank § 954
New listed company manual provisions must require listed companies to disclose their policies for clawing back incentive-based compensation paid to current or
former executive officers in the event of a restatement of the company’s
financials due to material non-compliance with any federal securities law financial
reporting requirement
© Stephen M. Bainbridge 2011
Comparing SOX to Dodd-Frank
SARBANES-OXLEY ACT Dodd-Frank
Individuals Subject to Claw back Provision
CEOs and CFOs of public companies who restate earnings
Current and former executive officers of exchange listed companies
Standing to Enforce Claw back Provision
SEC only -- no private right of action Issuer (Shareholder derivative standing?)
Circumstances that Trigger Claw back Provision
An accounting restatement due to the material non-compliance of the issuer with any financial reporting requirement under the securities laws
A restatement of the company’s financials due to material non-compliance with any federal securities law financial reporting requirement
Conduct that Triggers Claw back Provision
Unspecified “misconduct” in preparing financial statements
No misconduct required – apparently strict liability
Forms of Compensation Recouped under Provision
Any bonus or other incentive or equity based compensation
Excess bonus or incentive compensation (Δ amt paid and would have been paid if correct)
Claw back - Duration The 12 month period following issuance of the financial statements including restatements
Three years prior to date of restatement
© Stephen M. Bainbridge 2011 14
Implications of New Environment Increase in shareholder power to influence
board composition and executive pay Increase in power of proxy advisers who
advise institutional shareholders on how to vote – or to whom such shareholders delegate vote decisions
More pressure on boards to accede to wishes of most vocal shareholders – including pressure to conform to rigid ideas about governance and compensation practices
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