WASHINGTON—The Securities and Exchange
Commission adopted regulations Tuesday requiring companies to hold
nonbinding shareholder votes on executive-pay packages, handing a
weapon to investors seeking the attention of board directors.
The final "say on pay" rules implement
a mandate of last year's Dodd-Frank financial law that was long-sought
by shareholder-rights groups and labor unions while opposed by many
The SEC's rules, issued on a 3-2 vote,
apply to roughly 9,000 companies listed on U.S. exchanges. However,
they exempt for two years nearly 1,500 companies that have less than
$75 million in outstanding shares available for trading in public
markets and that also file proxy statements. An SEC official said the
commission may consider making permanent the exemption for smaller
Companies don't have to accept the
results of the say-on-pay votes. But board members may think twice
before approving packages that could anger shareholders.
"This is a change that is probably
going to lead to more dialogue between companies and their
shareholders," said Mark Borges, an executive compensation consultant.
The law requires the affected companies
to hold nonbinding shareholder votes on executive pay packages at
least once every three years, beginning at the first annual
shareholder meeting to occur on or after Jan. 21 of this year.
Because the mandate took effect with
the enactment of the Dodd-Frank law in July, a few companies,
Monsanto Corp., began holding the advisory votes this week.
Companies don't have to disclose the results of the vote for four
The movement to require say on pay in
the U.S. gained momentum during and after the financial crisis when
some critics blamed large pay packages for excessive risk-taking on
A push by shareholders prompted dozens
of U.S. companies to voluntarily hold advisory votes on executive-pay
packages last year. Around 10% of those votes failed, according to
Patrick McGurn, special counsel to RiskMetrics Group's ISS
Governance Services unit, which advises institutional investors on how
to vote corporate proxies.
The U.K. and Australia have required
companies to hold such votes on an annual basis in recent years. But
in the U.S., until now, only recipients of government financial-rescue
funds have been required to hold advisory votes.
The new rules also require companies to
disclose "golden parachutes," or pay arrangements for executives
departing amid a merger, in their merger proxy statements and hold
advisory votes on them in some cases. The temporary exemption for
smaller companies doesn't apply to the rules on golden parachutes.
While companies won't be bound by the
advisory votes, they will have to disclose in reports filed with the
SEC whether and how they considered the votes' results in setting
The Dodd-Frank law requires companies
to hold advisory votes at least once every six years to allow
shareholders to say how frequently they want to hold the say on pay
votes—once a year, every other year or once every three years.
Most companies so far have been
recommending to their shareholders that they opt to weigh in once
every three years on executive pay—the least frequent option. Of about
150 proxy statements filed by companies last Friday, 82 recommended a
triennial vote and 47 recommended an annual vote, Mr. Borges said.
Only 13 suggested shareholders vote every other year and 11 companies
made no recommendation.
The SEC also on Tuesday voted
unanimously to issue draft proposals requiring hedge-fund and other
private-fund advisers to file periodic reports with regulators seeking
to assess threats to the financial system.
And the SEC issued a proposal to revise
the definition of investors deemed sophisticated enough to invest in
private funds and other unregistered securities offerings. Under the
proposal, the existing $1 million net worth requirement for such
"accredited investors" will no longer include the value of their
Both proposals are now open for a
period of public comment. A second vote is required before they are
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