Say on Pay and SEC Rulemaking (Limiting Shareholder Rights)

The SEC has put out a rule proposal designed to implement the say on pay provisions in Dodd-Frank.  See Exchange Act Release No. 63124 (Oct. 18, 2010).

Rule 14a-21 mostly captures what Congress sought to imposed in Dodd Frank, with a few additional beneficial requirements (such as the obligation to explain how a board plans to respond to the advisory vote).

The SEC, however, has proposed something that arguably falls into the category of conforming amendments in Rule 14a-8.  The shareholder proposal rule would be amended to restrict its use with respect to a change in the frequency of say on pay votes. 

Specifically, the Commission wants to amend Rule 14a-8 (actually add a note) to "clarify" that it would allow for the exclusion of a proposal that addressed the frequency of the vote "provided the issuer has adopted a policy on the frequency of say-on-pay votes that is consistent with the plurality of votes cast in the most recent vote in accordance with Rule 14a-21(b)."  As the release noted:

• For example, if in the first vote under Rule 14a-21(b) the largest number of votes were cast for a two-year frequency for future shareholder votes on executive compensation, and the issuer discloses that it has approved a policy to hold the vote every two years, a shareholder proposal seeking a different frequency could be excluded so long as the issuer seeks votes on executive compensation every two years and provides a vote on frequency at least every six years as required by Section 14A(a)(2).

The Commission gave as an explanation the fact that proposals seeking to change the frequency of the vote "would unnecessarily burden the company and its shareholders given the company’s substantial implementation of a plurality shareholder vote regarding the frequency of say-on-pay votes."

The change is unnecessary and would not result in burdensome consequences.  The likelihood of such a proposal is not great and the likelihood it will pass is even less likely.  The risk of adoption will only occur where shareholders are particularly unhappy with management or management's compensation.  Shareholder authority should not be eliminated in those circumstances.  As for the burden, the bylaw at best would require say on pay resolutions more often.  While that may be a cost, it is a cost inherent in the provision adopted by Congress and should not, therefore, be viewed as a burden.