Pub. 1 2010 Issue 3

fall 2010 23 The Act also contains several provisions affecting corporate governance and compensation practices and disclosures for pub- lic companies and financial institutions. The Act authorizes the Securities and Exchange Commission (the “SEC”) to adopt proxy access rules permitting shareholders to use a company’s annual proxy materials to nominate individuals to serve on the company’s board of directors. The SEC pursued this policy last year, but questions arose regarding the SEC’s authority to pro- mulgate such rules. The Act puts to rest these questions. The Act further requires public companies to disclose additional de- tails regarding executive compensation, including descriptions of the relationship between executive compensation paid and the financial performance of the company and of the relation- ship between CEO compensation and the median employee compensation. The Act directs the SEC to promulgate “say on pay” rules requiring companies to provide shareholders with a nonbinding advisory vote on executive compensation. In an effort to discourage risky practices on the part of ex- ecutives, the Act requires public companies to adopt policies allowing the company to recover erroneously awarded com- pensation (also known as “clawback” policies). This provision states that a company must adopt “clawback” policies to recoup incentive compensation paid to executives if the company is required to prepare an accounting restatement due to noncom- pliance with any financial reporting requirement under the securities laws. If a company fails to adopt a “clawback” policy, the company will be delisted from its stock exchange. The Act also will usher in a new, more “shareholder-centric,” environment for public companies. The combination of the proxy access rules and “say on pay” requirements puts pressure on company boards to make shareholder relations a priority. These provisions grant shareholders greater voice on the actions of companies, and a company’s board must respond by ensuring that shareholders understand the board’s actions. Further, it is likely that shareholder advisory firms will enjoy a disproportionate influence on the operations of companies, as many institutional shareholders depend on the opinions of these firms to determine how they will vote their shares. Finally, it is likely that company boards will take an increasingly short-term view with respect to company projects and operations as a result of annual director elections becom- ing more contested. Q Susan Zaunbrecher is the Chair of Dinsmore & Shohl’s Corporate Department and Financial Institutions Practice Group. Nathan Hagler is a member of the firm’s Financial Institutions Practice Group. Both are attorneys in the firm’s Cincinnati office and can be reached at (513) 977-8200.