Happy Birthday Dodd-Frank

By Cydney Posner

Today marks the first birthday of Dodd-Frank and there has been some space (although not nearly as much as I would have anticipated) in the blogosphere and elsewhere allocated to assessing its effectiveness, mostly with respect to reforms of the financial system. (See, for example, this article from The Harvard Law School Forum on Corporate Governance and Financial Regulation, these from the Conglomerate blog about the Volker rule (http://www.theconglomerate.org/2011/07/dodd-frank-1-volcker-rule-by-the-numbers.html?%20%20utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+theconglomerate%2Ffeed+%28Conglomerate%29;  http://www.theconglomerate.org/masters-dodd-frank1/)  and this op-ed from yesterday's Wall Street Journal by Treasury Secretary Tim Geithner opposing efforts to repeal provisions of Dodd-Frank.  A number of studies by the SEC were also due to be sent to Congress today, on the topic of framework for designated clearing entity risk management and credit ratings.

Here, however, is a piece, Dodd-Frank@1: What to Say about Say on Pay?, on Conglomerate evaluating say on pay.

The article notes that Dodd-Frank's say-on-pay provisions were highly controversial, citing at least one poll that showed that 85% of shareholders supported say on pay, while 95% of directors opposed it. In essence, the author suggests that the jury is still out on the effects of say on pay. Shareholders have rejected executive compensation at less than 2% of companies and gave more than two-thirds of companies a favorable vote of 90% or more and thus have appear not to have used their new franchise to challenge company's compensation practices. However, "to the extent at least one goal of the say on pay rules was to prompt dialogue around compensation practices and thus avoid negative votes, perhaps that rate suggest enhanced dialogue between shareholders and directors. Of course it is too soon to tell the more important question-whether the rules or the negative votes have any impact on compensation." In contrast, shareholders have been more willing to reject say-on-frequency recommendations by boards, favoring annual votes notwithstanding board recommendations in favor of triennial say-on-pay votes. In addition, the author observes that, even at this early stage, some companies have already "indicated their intent to alter their practices to address shareholder concerns, and engage in greater dialogue with shareholders, suggesting that companies are not simply ignoring the vote (or at least they are not saying that they are ignoring the vote)."

Negative say-on-pay votes have triggered at least seven lawsuits alleging breach of fiduciary duties, corporate waste and unjust enrichment. Executive compensation consultants have also faced aiding and abetting claims. The author dismisses as remote the possibility that "these suits will have any traction, particularly given (a) the relative deference courts give to compensation decisions, and (b) that Dodd-Frank specifically states that the say on pay rules are not intended to create or imply any changes or additions to directors' fiduciary duties."

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