SEC Rules on Executive Compensation, Committee Governance and Advisor Independence

The Dodd-Frank Act, signed into law in July 2010 by President Obama, shines a bright light on many issues related to Executive Compensation and Corporate Governance.  Specifically, one section (952) requires the SEC to adopt rules  regarding Compensation Committee members’ independence and suggests a specific list of factors to be identified that will govern the Committee’s advisors.  To quote chapter and verse, Section 952 – The Commission is directed to establish competitively neutral independence factors for all who are retained to advise compensation committees

First, a couple of definitions according to Webster’s dictionary:

Independentnot subject to control by others, not requiring or relying on something else, not looki ng to others for one’s opinions or fo r guidance in conduct

Neutral – having no personal preference, not supporting or favoring either side…

Personally, I don’t know how “independence” can be anything other than “neutral”…this seems a little redundant, but I digress.

The SEC is required to adopt the new rules by July of 2011 (within one year of the law being signed).   The rules will require that public companies disclose in their proxy when they hire an outside compensation consultant, whether potential conflicts of interest exist (in other words – if the consultant has a personal preference or is potentially subject to control by others) and what the Committee has done to address the potential conflict.  This will obviously influence Committee behavior in hiring such advisors by encouraging them to avoid any potential conflicts or breaches of neutrality and independence.    In only the most extreme cases, could a Committee justify hiring an advisor that violates the independence test without public scrutiny and shareholder unrest.

Much like Sarbanes-Oxley’s requirements of independence and neutrality with regard to Audit Committee advisors, these new rules on corporate governance seem to fall into the category of “doing the right thing”.  Some consulting activities that seem to contradict this characteristic would be selling products to companies whom you advise, simultaneously working for management on other projects without full disclosure and prior approval of the Committee or an engagement advising companies for fees where the consulting principals have a significant ownership position (i.e. shareholder).

At Matthews-Young, we have always subscribed to the higher ideal of “doing the right thing”.  We require that we be hired and report directly to the Compensation Committee when we are engaged for Executive Compensation work.  We have no sources of revenue other than being paid for our  time and knowledgeable, expert advice without “supporting or favoring either side”.

If we can assist you with improving your company’s governance and committee effectiveness please give us a call at 919-644-6962 or ask us to contact you at http://matthewsyoung.com/contact.htm.

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