Say on Pay and the First 100 Days

BNA reports that Brian Foley, managing director of Brian T. Foley & Co., White Plains, N.Y., said at an ALI-ABA conference on executive compensation that he expects "say on pay" to become law within 100 days of the next administration, irrespective of who wins.  In other words, it will be a priority of both McCain and Obama.  Obama has, of course, introduced in the Senate the "say on pay" bill drafted by Congressman Barney Frank in the House. 

Federal adoption of say on pay illustrates several themes that have been developed at length on this Blog.  First, the say on pay bill gives to the SEC the authority to define the compensation plan put forward for a vote.  In other words, it thrusts the SEC right into the corporate governance process and moves the Agency further away from the traditional role of disclosure and towards the substance of corporate governance.  This is a theme developed in the piece, Corporate Governance, the SEC, and the Limits of Disclosure.  This is a trend that was evident in the provisions of SOX and looks to continue. 

Second, the need for federal intervention reflects frustration with the anti-shareholder law that has developed in Delaware.  The courts have not provided meaningful standards for the adoption of executive compensation.  Compensation, as a result, continues to escalate.  The absence of meaningful standards provides growing impetus for federal preemption of areas traditionally left to the states.  It is the states that determine the standards for executive compensation and the matters that are subject to shareholder approval.  Say on pay strips some of that authority away from the states.

In the end, the excessively anti-shareholder nature of Delaware law will prove to be self defeating.  The Paulson proposals on reorganizing the financial system called for a dramatic expansion in the type of entities that should be subject to federal incorporation.  Say on pay is only the latest effort in this area, another trend that is likely to continue.