Preparing for Regulatory Changes, Top U.S. Companies Act on Corporate Governance, Compensation Priorities

NEW YORK, Aug. 16 /PRNewswire/ -- With the specter of dramatic regulatory changes hovering over them, U.S. public companies have been acting aggressively to streamline corporate governance practices and establish their executive compensation priorities, according to Shearman & Sterling's eighth annual Corporate Governance Surveys of the 100 largest U.S. public companies.

This year's surveys -- the eighth annual examination of general governance practices and director and executive compensation practices -- are once again based primarily on an in-depth analysis of the 2010 proxy statements of the 100 largest U.S. public companies. These proxy statements were filed months before the recent signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which calls for sweeping regulatory changes, including changes to U.S. corporate governance and executive compensation practices.

"Our surveys this year clearly reflect the continuing evolution of the corporate governance landscape and the increasing responsiveness of boards to the more active interests of shareholders and the broader investment community," said John J. Madden, the Shearman & Sterling partner who founded the firm's Corporate Governance Advisory Group. "Corporate governance and executive compensation changes have been anticipated for quite some time, and many companies were already ahead of the curve before Dodd-Frank even became part of our regulatory lexicon."

Added Linda E. Rappaport, head of the firm's Executive Compensation & Employee Benefits practice, "Much the same can be said for executive compensation issues. Compensation committees have had clawbacks, say-on-pay shareholder proposals and other changes on their radar screen for quite some time and especially this year, and Dodd-Frank has simply added to their sense of urgency."

The general corporate governance survey findings reflect continued development in corporate governance policies and practices, driven in large part by shareholder activists and institutional investors. This year's survey includes a review of 41 top institutional investors that made corporate governance and proxy voting guidelines publicly available.

Key corporate governance findings include: 

• Majority voting in uncontested director elections has been implemented in some form by 82 of the 100 largest companies, up from 75 last year and from just 11 as recently as 2006.
• Despite amendments to NYSE Rule 452 implemented last year (eliminating broker discretionary voting in director elections), no director standing for reelection at one of the 100 largest companies failed to receive majority support this year.
• The number of Top 100 Companies at which the CEO is the only member of the board of directors who is not independent increased significantly, rising to 59 this year from 49 last year.
• The number of Top 100 Companies with classified boards, of which there were 54 in 2004, declined to only 20, and of those 20, more than one-third were either in the process of declassifying their boards or received approval from their shareholders this year to do so.

On the executive compensation side, the survey indicates that the link between risk disclosure and executive compensation has become much tighter than ever before. According to the 2010 proxy statements, 86 of the Top 100 Companies addressed the impact of the company's compensation programs on its overall risk profile, even if not required to do so. In addition, although not required, 61 of these companies voluntarily affirmatively stated that their compensation policies and practices do not create material adverse risk.

Other key findings include:

• Seventy-one companies disclose they maintain an executive compensation clawback policy (an increase from 56 companies in 2009 and 35 in 2007  -- representing a 103% increase in four years). This will become increasingly significant, as the new Dodd-Frank Act mandates clawbacks if a material restatement would have affected the amount received.
• There was a decrease in the overall number of compensation-related shareholder proposals; however, advisory say-on-pay policies continued to be the most prevalent proposal. In addition, the survey suggests that companies cannot assume that their say-on-pay advisory resolutions will pass. For example, three public companies (including one Top 100 Company) failed to win majority support in the 2010 proxy season. 

"U.S. companies have been trending toward greater oversight of compensation policies in recent years, and the financial crisis in 2008 certainly provided the impetus for change," said Doreen E.  Lilienfeld, the Shearman & Sterling partner directing the Director and Executive Compensation Practices Survey. "Now that we have turned the corner, I would expect to see a continued commitment on the part of corporate leadership to better align pay and company performance."

The survey also includes an in-depth comparison of US compensation policies against standards in other jurisdictions around the world.

Taken as a whole, this year's Corporate Governance Surveys suggest a period of significant change and uncertainty, even with the adoption and communication of new regulations and guidelines.

"We are clearly past the point of business as usual," said Stephen T. Giove, the Shearman & Sterling partner who directed the Corporate Practices Survey. "Dodd-Frank and other regulatory changes significantly reshape the roadmap going forward. The challenge will be to adhere to the new guidelines while remaining true to the character of the organization. The risk here is that Dodd-Frank may move companies and their boards to become too formulaic in their approach to company-specific challenges. Board leadership will be even more essential going forward."

The survey is available on request from Shearman & Sterling's web site at www.shearman.com/corporategovernance.

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