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Wall Street Journal, January 25, 2011article


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POLITICS   |   JANUARY 25, 2011, 6:25 P.M. ET

SEC, in Split Vote, Adopts 'Say on Pay' Rule


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 companies.

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.

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, including Monsanto Corp., began holding the advisory votes this week. Companies don't have to disclose the results of the vote for four days.

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 Wall Street.

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 executive pay.

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 primary residence.

Both proposals are now open for a period of public comment. A second vote is required before they are made final.

Write to Jessica Holzer at


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