(The news featured below is a selection from the news covered in Federal Securities Law Reporter, which is distributed to subscribers of Federal Securities Law Reporter.)

House Passes Bill Requiring Shareholder Advisory Vote on Executive Compensation

A bill requiring public companies to allow a non-binding advisory shareholder vote on corporate executive compensation plans has passed the House of Representatives by a vote of  269-134. Specifically, the legislation builds on the SEC’s executive pay disclosure rules to require that companies include in their annual proxy to investors the opportunity to vote on the company’s executive pay packages.  Last year, the SEC took a major step forward by requiring that companies significantly improve their executive compensation disclosures to shareholders. Financial Services Committee Chair Barney Frank believes that the Act is needed because the SEC-mandated disclosure, while important, is incomplete. On the day of passage, April 20, 2007, Sen. Barack Obama introduced a companion bill in the Senate (S 1181) requiring a shareholder advisory vote on executive compensation.

The Shareholder Vote on Executive Compensation Act (H 1257) also contains a separate advisory vote if a company gives a new, not yet disclosed, golden parachute to executives while simultaneously negotiating to buy or sell a company. This rare second vote is designed to empower shareholders to protect themselves from senior management's natural conflict of interest when negotiating an agreement to buy or sell a company while simultaneously negotiating a personal compensation package.

An amendment during mark-up by Mr. Frank, who sponsored the Act, delays the shareholder advisory vote until 2009. According to Rep. Frank, the effective date of the Act was delayed at the request of the Business Roundtable so there would be no burden in paperwork on companies. (Cong. Rec., Apr 20, 2007, H3706).

 The Act is designed to ensure that shareholders have an opportunity to give their approval or disapproval on the company’s executive pay practices.  As such, the bill represents a market-based approach empowering shareholders to review and approve their company's comprehensive executive compensation plan.  In that spirit, the bill does not establish any artificial restrictions on executive compensation, nor does it seek to set any form or measure of executive compensation. Similarly, the committee has emphasized that the shareholder vote is advisory in nature, which means that the board and the CEO of a company can ignore the will of the shareholders if they so choose.

According to Rep. Frank, the Act in no way intrudes Congress or the SEC into the process of setting management compensation. That said, the House financial services chair does believe that boards of directors are not likely to disregard an advisory opinion from the shareholders.

As a matter of sound corporate governance, observed Rep. Frank, Congress feels that the advisory vote is important input that the board should have. The chair rejected the argument that the Act unduly interferes with the affairs of the corporation, noting that corporations do not exist in nature. They are the creations of positive legislative action, he reasoned, and have no powers except those the government gives them.

Indeed, he believes that the Act embodies good governance by letting the shareholders who own the company vote on information that the SEC has already required the company to put forward as to whether or not they approve or disapprove. The chair similarly rejected arguments that the Act will be burdensome, noting that it requires simply that corporations add to the proxy a box that says ``I approve/I disapprove,’’ and shareholders can check it as appropriate. The sole corporate expense is the ink in printing ``approve'' or ``disapprove,'' and the tallying along with the other tallying. There is no additional paperwork. And shareholders can say ``yes'' or ``no'' to the proposed executive compensation without diminishing or interfering with the board's legal authority.

The House Financial Services Committee has published a committee report (110-088) to accompany the bill. The report states that, in addition to requiring an advisory shareholder vote on executive compensation disclosure, the Act requires an additional advisory vote if the company awards a new golden parachute package while simultaneously negotiating the purchase or sale of the company. The report explains that the rare second vote was added out of a fear that CEOs may be willing to sell the company for less or pay more for another if they personally receive a larger package, thereby reducing shareholder value. The report clarifies that this provision would not apply to long-disclosed change in ownership agreements; and would only apply to new provisions added while negotiating the sale/purchase.

The report also states that the annual nonbinding advisory vote is designed to give shareholders a mechanism for supporting or opposing a company's executive compensation plan without micromanaging the company. Knowing that they will be subject to some collective shareholder action will help give boards more pause before approving a questionable compensation plan. As is the case in other countries that require shareholder advisory votes on executive pay, the committee expects this tool will improve dialogue between management and shareholders on compensation and make compensation a more efficient tool for improving and rewarding management performance. Indeed, in the view of Rep. Carolyn Maloney, the underlying purpose of this bill is to allow shareholders to have a vote on a link between pay and performance

Shareholder advisory votes on executive compensation are mandated in the United Kingdom and other EU jurisdictions. The UK Companies Act requires a shareholder advisory vote on the directors’ remuneration report. In the Netherlands, a principle of the Tabaksblat Code on corporate governance provides that the supervisory board’s remuneration policy must be submitted to the shareholders for adoption. According to Rep. Albio Sires, in the UK and Australia, which have similar systems, granting shareholders a say over executive compensation has improved dialogue between executives and shareholders and has increased the use of long-term performance targets in incentive compensation.

The House rejected a number of Republican amendments to the Act. For example, an amendment exempting issuers from the shareholder advisory vote if they provide the majority of the executive's compensation in the form of nonqualified deferred compensation was rejected. In opposing the amendment, Rep. Frank emphasized that the Act is scrupulously and completely neutral as to how the corporations pay their executives. Congress must not pick and choose what is the right kind of corporate compensation and what is not the right kind of corporate compensation.

Similarly rejected was an amendment conditioning the Act’s effectiveness on a mandated SEC study on whether the new rules would significantly hinder a company’s recruitment and retention of executives. If the SEC so found, the nonbinding shareholder vote would not be required. In defeating the amendment, Rep. Frank emphasized that Congress cannot constitutionally be made to wait for permission to act from a regulatory agency. He does not oppose an SEC study; however, adding that between now and 2009 the SEC can do a study if the agency so desires. He would even support a separate mandate for a study unlinked to the Act’s effectiveness.

The House also rejected an amendment requiring shareholders casting a vote on behalf of the beneficiaries of a pension fund to disclose how they voted. The Republicans argument was why should only the mutual fund industry have to inform their shareholders how they cast their votes.

The SEC requires mutual funds to disclose to fund shareholders how they cast their proxy votes. Rep. Frank pointed out that the SEC has plenary power over mutual funds, which it does not have over foundations. Committee staff believes that the SEC could not do what the amendment demands. It is faulty to reason that the SEC can mandate proxy voting disclosure for other fiduciaries just because the agency has done so for funds. It would take separate legislation, he noted.

The Act is opposed by the US Chamber of Commerce. In a letter to Rep. Spencer Bachus, Ranking Member on the Financial Services Committee, the Chamber contended that such shareholder advisory votes are more likely to reflect shareholder views on past stock or management performance rather than real insight into how to structure future compensation to ensure it drives future results. Further, the Chamber is concerned that this mandate would result in yet another forum for special interest politics.