How Dodd-Frank Wall Street Reform Is Holding Management Accountable

The financial crisis of 2008 continues to reverberate throughout boardrooms nationwide.

The Dodd-Frank Wall Street Reform & Consumer Protection Act of 2010, Congress' response to the crisis, includes a number of measures that seek to encourage management accountability. One of those is "say on pay," requiring public companies to give shareholders a chance to vote yes or no to executive pay packages. Although the vote is nonbinding, it has had an effect.

Greg Ruel, a senior researcher at GMI Ratings of New York, which provides research and ratings on the performance of public companies, told Arkansas Business that the "impact of the nonbinding vote of say on pay has certainly been felt.

"Companies receiving low voter support on pay plans have begun to engage shareholders on pay issues," Ruel said in an email response to questions. "A variety of S&P 500 companies added commentary in the proxy statements this year explaining which shareholders they had met with since last year and then detailed changes made to compensation policy as a result of these meetings.

"This type of interaction between management and shareholders was not happening a couple years ago."

Company boards are taking compensation issues and "what their shareholders are saying via ‘say on pay' much more seriously and looking at the compensation programs," said Josh Henke of Longnecker & Associates of Houston. This "black-and-white yes-no vote," Henke said, is forcing company boards to examine their executive compensation packages.

Both Ruel and Henke cited Nabors Industries, an oilfield services company. Its shareholders last year rejected the executive compensation plan. In February, after much publicity, the company's former chairman and CEO, Eugene Isenberg, rejected a $100 million payout his contract guaranteed when he was replaced as chief executive. At Nabors, Ruel said, "a number of changes were disclosed in this year's proxy attempting to tie pay to performance."

Dodd-Frank also requires public companies to disclose the relationship of executive pay to company performance and the ratio between the CEO's total compensation and the median total compensation for all other company employees.

In addition, it requires them to "claw back" bonuses from executives if company financials contain significant errors. The SEC, however, has not yet issued regulations regarding these requirements, and Henke said he didn't expect those to be handed down until early next year. Ruel said he thought the pay ratio figure was "generating a great deal of opposition."

Asked how company shareholders can seek to ensure management accountability, Ruel said:

"Time vesting restricted stock and stock options are no longer a suitable pay vehicle. These awards should vest only for exceeding the median of the peer group. Executives are most accountable to their boards and shareholders when pay is clearly established beforehand. If a company does not best the performance of its peers, it stands to reason that executives should suffer along with the shareholders."

(To read about executive compensation at Arkansas' publicly traded companies, click here.)