On July 21, 2010, President Obama signed the "Dodd-Frank Wall Street Reform and Consumer Protection Act" (the "Act"). Portions of the Act were effective immediately, while others have delayed effective dates or require the SEC to adopt implementing regulations. This article focuses on the executive compensation and corporate governance provisions under the Act applicable to public companies registered under the Securities Exchange Act of 1934 (the "Exchange Act") and provides practical suggestions that boards of directors may wish to consider.

The key executive compensation and corporate governance provisions under the Act include the following:

• Allow shareholders to have a nonbinding advisory vote on compensation packages of key executives not less than once every three years.
• Allow shareholders to have a nonbinding advisory vote on golden parachute payments in conjunction with certain business combinations.
• Require companies to implement policies to "clawback" incentive compensation from current and former executives if there is an accounting restatement due to material noncompliance with financial reporting requirements, with a three-year look-back period.
  
• Require enhanced disclosure in proxy statements regarding executive compensation
• Provide heightened independence requirements for compensation committee members and disclosure requirements regarding their relationship with compensation consultants and any conflicts of interest.
• Provide new independence standards for compensation consultants, law firms and other advisers to compensation committees.
  
• Authorize the SEC to implement shareholder proxy access for the election of directors.
• Prohibit broker discretionary voting in director elections, executive compensation or other significant matters to be determined by SEC rulemaking.
  It should be noted that mandatory majority voting in director elections was originally included in the Senate version of the Act but was not included in the final legislation.

Say-On-Pay - Executive Compensation
The Act requires companies to provide shareholders with a nonbinding advisory vote on compensation packages of key executives at least once every three years. In addition, shareholders are entitled to determine, at least once every six years, the frequency (once every one, two or three years) with which such advisory vote on executive compensation must be sought. Although the vote is nonbinding, a negative vote would send a message to the company and may be indicative of future results for votes for directors that are members of the company's compensation committee.

Both resolutions on executive compensation must be included in proxy statements for shareholder meetings occurring six months after July 21, 2010, the date of enactment of the Act (the "Date of Enactment"). No further SEC rulemaking is required in order for this say-on-pay legislation to take effect.

In order to assist companies in implementing these new requirements, we offer the following:

• Engage in a dialogue with shareholders and proxy advisory firms. New processes should be implemented to communicate with shareholders and proxy advisory firms regarding compensation programs, provided that companies adhere to the prohibition against selective disclosure under Regulation FD.
  
• Explain philosophy behind all compensation. Provide specific information in SEC filings and in dialogues with shareholders regarding the rationale for all compensation being paid, including differences in compensation paid to executive officers versus other employees.
  
• Review compensation arrangements. Review the current compensation arrangements to ensure that they correlate with stated objectives, including pay for performance that your board intends to be incentivized.

Say-On-Pay - Golden Parachute Payments
The Act provides that in any proxy statement where shareholders are asked to approve an acquisition, merger, consolidation, sale or other disposition of all or substantially all the assets of an issuer, the company must:

1. Disclose any agreements or understandings it has with any named executive officers concerning any compensation payments (whether present, deferred or contingent) that are based on or otherwise relate to the transaction and the aggregate total of all such compensation (including conditions, if any) that may be paid or become payable; and
   
2. Provide shareholders with a separate nonbinding advisory vote to approve such agreements and the compensation payments disclosed. Such advisory vote is non-binding and is not required if such payments have already been subject to the general say-on-pay on executive compensation described above.

The golden parachute say-on-pay resolution must be included in proxy statements for shareholder meetings occurring six months after the Date of Enactment. Within six months following the Date of Enactment, the SEC will implement further rules regarding say-on-pay for golden parachute payments.

In order to assist companies in implementing these new requirements, we offer the following:

• Review what pay practices or executive rights would be considered a payment for purposes of the new rule. Relevant payments could be everything from rights under employment agreements to severance plans to deferred compensation arrangements to stock option and restricted stock grants.
• Consider whether your pay practices need to be more integrated and rationalized. Most companies implement pay programs one-at-a-time and don't look at the interrelation of the programs. Consider all the cumulative rights these plans create; disclosure may be needed to explain why certain practices exist or modifications may be needed to harmonize all compensation elements.

Clawbacks
The Act requires a company to implement and disclose its policy on incentive-based compensation and recoup (clawback) incentive-based compensation (including stock option or restricted stock awards) from any current or former executive officer in the event of an accounting restatement as a result of the company's "material noncompliance" with any financial reporting requirement under the securities laws. The amount recoverable is the excess over what would have been paid under the accounting restatement, with a three-year look-back period. "Material compliance" is not defined under the Act but may be clarified in the implementing SEC regulations. Misconduct is not required.

As the Act requires the SEC to direct the national securities exchanges to implement listing standards that require listed companies to have clawback policies, further NYSE and NASDAQ rulemaking is required before these provisions take effect. In order to assist companies in implementing these new requirements, we offer the following:

• Craft clawback policy and prepare corresponding disclosure. Implement a policy that provides clear guidelines regarding the recoupment of incentive compensation from current and former executive officers and prepare the corresponding disclosure in the proxy statement.
  
• Review existing compensation arrangements, including incentive plans and employment agreements for any necessary modifications. Review incentive plans and forms of award letters or agreements to determine whether explicit provisions outlining the clawback should be added and whether changes in employment agreements or other agreements need to be implemented. Determine if such modifications or implementation of a clawback policy would trigger severance payments (e.g., "right to terminate employment for good reason.")

Disclosure on Executive Compensation
The Act requires the following disclosure on executive compensation:

1. The (i) median of the annual total compensation of all employees other than the CEO, (ii) annual total compensation of the CEO and (iii) ratio of such median employee annual total compensation to the CEO annual total compensation;
   
2. Enhanced disclosure on the relationship between executive compensation actually paid and the financial performance of the company, taking into account any change in the value of the shares of stock and dividends of the company; such disclosure may include a graphic representation of the required information to be disclosed;
   
3. Enhanced disclosure of the reasons why a company has chosen the same (or different) persons as Chairman and CEO; and
   
4. Disclosure as to whether any employee or director (or designee) is permitted to purchase financial instruments that are designed to hedge or offset any decrease in the market value of the equity securities granted to such employee or director as part of such employee or director's compensation, or held, directly or indirectly, by such employee or director.

While the disclosure of each of the above items is required in a company's annual proxy statement, the disclosure of the CEO's pay versus the median pay of employees is also required in all SEC filings set forth in Item 10(a) of Regulation S-K, including registration statements and 10-K annual reports.

The Act directs the SEC to enact new rules regarding this enhanced executive compensation disclosure within 180 days of the Date of Enactment, so companies should continue to monitor new disclosure requirements. In order to assist companies in implementing these new requirements, we offer the following:

• Prepare ratio of CEO pay versus employee pay. Calculate and analyze the ratio of CEO total compensation in relation to the median total compensation for all other employees for the past fiscal year. Consider the disclosures that will need to be made to explain the differences in compensation. In doing so, consider the following:
  • Total compensation is defined in Item 402(c)(2)(x) of Regulation S-K, and includes salary, bonuses, values of equity awards, perquisites and all other compensation.
    
  • Review the elements of CEO total compensation as calculated in the current Summary Compensation Table.
    
• Prepare enhanced disclosure on executive compensation for 2011 proxy statement. Review last year's proxy statement and consider providing greater disclosure regarding your compensation policies and alignment to financial performance.
  
• Prepare disclosure on hedging policy. Implement a policy regarding hedging by employees and directors in respect of equity securities granted by the company or held by them and prepare the corresponding disclosure in the proxy statement.

Independence of Compensation Committees, Consultants and Legal and Other Advisers
The Act requires the SEC to direct the national securities exchanges to adopt listing standards that would require each member of a company's compensation committee to be independent, similar to the requirements currently in place for audit committee members pursuant to Sarbanes-Oxley. Whether a member of the compensation committee would be considered independent would depend on such factors as the source of compensation paid to a compensation committee member (including any consulting, advisory, or other compensatory fee paid by the company to such member), and whether the member is affiliated with the company directly or through an affiliate or subsidiary of the company.

The Act also requires that compensation consultants, legal counsel and other advisers engaged by the compensation committee be selected only after considering factors that may affect the advisers' independence. The Act directs the SEC to identify such factors, including:

1. The services by the employer of the adviser to the company;
   
2. The amount of fees received by the employer of the adviser to the company as a percentage of total revenue of such employer;
   
3. The policies and procedures of the employer of the adviser that are designed to prevent conflicts of interest;
   
4. Any business or personal relationship the adviser has with a member of the compensation committee; and
   
5. Any stock of the company owned by the adviser.

The company must provide appropriate funding for the compensation committee to retain compensation consultants, legal counsel or other advisers, leaving the direct responsibility for the appointment, compensation and oversight of the compensation consultant, legal counsel or other advisers to the compensation committee. The Act further requires the company to disclose in its annual proxy statement whether the compensation committee retained or obtained the advice of a compensation consultant and whether the work associated with the compensation consultant raised any conflict of interest, and, if so, the nature of the conflict and how the conflict is being addressed.

The disclosure regarding retention of compensation consultants and any conflicts of interest must be included in proxy statements for shareholder meetings occurring one year after the Date of Enactment. Within 360 days of the Date of Enactment, the SEC will be required to direct the national securities exchanges to implement listing standards that prohibit any listed company that is not in compliance with the compensation committee and compensation consultant requirements of the Act from listing its securities on such exchanges. The existing standards for the stock exchanges test independence through a variety of factors that might signal a potential conflict of interest and requires the issuer to make an affirmative determination that independence is satisfied.

In order to assist companies in implementing these new requirements, we offer the following:

• Review need for independent legal counsel. In light of these new requirements, directors should review the current legal needs of the compensation committee and the current relationships they have with legal counsel to determine whether there is a need to engage independent legal counsel to the compensation committee.
  
• Review independence of compensation committee members. Consider the changes that might be necessary to the composition of your compensation committee in anticipation of the heightened independence standards.
  
• Review independence of advisers. Review the factors enumerated above to determine whether compensation consultants, legal counsel and other advisers will be deemed independent. According to the Act, this assessment is required before such adviser is retained by the compensation committee.
  
• Review relationships with compensation consultants. Review relationships with compensation consultants to determine if any conflicts or potential conflicts of interest exist. If conflicts or potential conflicts exist, prepare the corresponding disclosure and take steps to eliminate such conflicts.

Proxy Access
The Act provides that the SEC may adopt proxy access rules to facilitate the ability of shareholders to nominate directors. The SEC's most recent proposal on proxy access in May 2009 called for a sliding ownership threshold ranging from 1 to 5 percent depending on a company's market capitalization, as well as a one-year holding period. It is likely that the SEC will issue rules to implement the Act's proxy access requirements in time for the 2011 proxy season.

In order to assist companies in implementing these new requirements, we offer the following:

• Anticipate shareholder activism. Understand your company's shareholder base and identify significant shareholders, and engage them in regular communications.
  
• Anticipate the areas of concern of shareholder activists. Consider "hot" areas of shareholder activism and factors that might provide an invitation to activists to use proxy access to push for changes in corporate behavior.
  
• Review your by-laws, nominating committee charter and any corporate governance guidelines. In light of expected SEC rulemaking to provide for shareholder proxy access, consider potential changes to your by-laws, nominating committee charter and any corporate governance guidelines to reflect the requirements that shareholders will need to meet to nominate directors.

Broker Discretionary Voting
The Act now prohibits broker discretionary voting with respect to director elections, executive compensation or other significant matters as will be determined by further SEC rulemaking. As a consequence, brokers may no longer vote uninstructed shares on significant proposals such as "say-on-pay," which increases the possibility of such proposals being voted down by shareholders.

Given the risks associated with the prohibition of broker discretionary voting in these important matters and the mandate for shareholder say-on-pay, companies may wish to consider the following:

• Anticipate impact of broker non-votes. Anticipate the impact of broker non-votes and abstentions.
  
• Examine proxy advisory policies. Review proxy advisory policies to determine the likelihood of a "vote against" or "withhold" recommendation.
  
• Consider hiring proxy solicitation firm. If your company maintains a large retail shareholder base, consider hiring a proxy solicitation firm to "get out the vote" for director elections and say-on-pay proposals.

Additional Requirements for Financial Institutions
The Act imposes additional requirements on certain financial institutions, including registered broker-dealers, with assets of $1 billion or more. Under the Act, the appropriate Federal regulators must prescribe the following regulations or guidelines no later than nine months after the Date of Enactment:

1. Require the disclosure by covered financial institutions to the appropriate Federal regulator the structure of all incentive-based compensation arrangements to determine whether the compensation structure provides an executive officer, employee, director or principal shareholder with excessive compensation, fees or benefits or could lead to material financial loss to the covered financial institution; and
   
2. Prohibit incentive-based payment arrangements that the regulators determine encourage inappropriate risks by covered financial institutions by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees or benefits or that could lead to material financial loss to the covered financial institution.

Disclosure Requirements for Oil & Gas, Mining and Other Resource Extraction Companies
While not directly related to executive compensation or corporate governance, the Act's impact on the natural resource industry is of particular importance to many lawyers across the Houston area.

The Act requires any company who engages in the commercial development of oil, natural gas or minerals to include in its annual reports filed with the SEC disclosure regarding any payments made by the company to the United States or a non-U.S. government, agency, instrumentality or department for the purpose of furthering the commercial development of oil, natural gas or minerals. The disclosure must include the type and total amount of such payments made for each project of the issuer and the type and total amount of such payments made to each government, agency, instrumentality or department. The Act requires the SEC to issue final rules to enact the foregoing within 270 days after the Date of Enactment.

Additionally, any company that is an operator, or has a subsidiary that is an operator, of a coal or other mine subject to the Mine Safety Act must include in each annual and quarterly report it files with the SEC detailed information regarding the safety record of each such mine for the time period covered by such report. The SEC is authorized to issue rules to carry out the purposes of the foregoing.

Aaron J. Scheffler is an associate and Jonathan B. Newton is a partner in the Corporate & Securities section of the Houston office of Baker & McKenzie LLP. Maidie Ryan is the Assistant General Counsel of Seahawk Drilling, Inc. and is a member of The Houston Lawyer editorial board.

Author's Note
Roslyn Tom, a Corporate & Securities partner in the New York office of Baker & McKenzie LLP, provided valuable contributions to the content of this article.