As the US financial reform bill began winding its way through Congress last year, Baker & McKenzie lawyers started to realize it would affect more than the banking industry — much more. Not only would the new law represent the most sweeping financial regulatory reform since the Great Depression, it would also have a dramatic impact the 7,000-plus public companies in the US.
“We monitor these issues very closely on behalf of our clients,” says Jonathan Newton, a partner in the firm’s North America Corporate & Securities Practice.
The focus of the legislation, which passed the House on July 1 and the Senate on July 15, is to fix systemic problems within the banking industry that led to the global financial crisis. But it also contains provisions that target corporate governance, such as giving shareholders more say on executive compensation and increasing margin requirements for derivatives trading, even for legitimate business hedging purposes.
Even before the 2,300-page law passed, our Corporate & Securities Practice pulled together a team of 20 lawyers across nine US offices to monitor the law and
update clients on developments.
The team created a 60-minute webinar to help public companies understand its implications on executive compensation, corporate governance and proxy statements and how to comply with the new requirements. The firm also teamed with executive compensation advisors Towers Watson and shareholder advisory group ISS to co-lead
the webinar, on July 27 and a
series of seminars held in Baker & McKenzie offices throughout the US in early August.
The new law requires public companies to allow shareholders to vote on executive pay packages, implement clawback provisions to recoup bonuses paid to executives on earnings that were later restated and include charts on proxy statements showing how much the CEO makes compared to the company’s median salary.
Some changes will have a more direct impact on the board than others, but all of them could lead to negative publicity if companies don’t take precautions to address the issues raised in the bill. Although shareholder votes on executive pay will be non-binding, for example, it would be a black mark on the company and its directors.
“What can happen is the institutional shareholders vote out the compensation committee directors who approved it,” Newton says. “If directors don’t better manage their pay practices and communications with shareholders, they risk getting withhold votes. That’s not something any director wants.”
Now that the bill has passed, public companies will need to conduct internal reviews of their pay practices, corporate policies and bylaws to develop an action plan that could take more than a year to implement. In the months ahead, Baker & McKenzie lawyers are poised and ready to guide clients through the process.