Corporate Governance and Executive Compensation

The financial crisis, coupled with public shock over a few mammoth frauds and widespread adverse reaction to certain now highlighted business practices, led Congress to focus on ways to enhance corporate accountability to shareholders and investor protection overall. The governance provisions of the legislation affect public companies broadly—and, in particular, boardroom practices—well beyond the financial services industry where the crisis originated. Some observers believe they create the potential for a significant shift in governing power from boardrooms to shareholders. Perhaps the most significant impact on how boards and institutional shareholders function and relate to each other, however, may come indirectly from the array of provisions that will increase financial and market transparency. These provisions, previously discussed, include increased regulation of derivatives trading,* hedge funds, private equity funds, and credit rating agencies.

Some widely discussed governance proposals—majority voting for directors, limits on executive compensation, and mandatory board risk committees for nonfinancial companies—did not make their way into the final legislation. However, as discussed below, many significant changes have been included, including proxy access authority, say-on-pay, further limits on broker discretionary voting, requirements for compensation committee and adviser independence, heightened disclosure of compensation and board leadership, and mandatory clawback policies.

*  As discussed above, use of the end-user exemption is conditioned upon approval by the relevant board committee.