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We have posted notes from 6 panels of PLI’s Securities Law Institute in our “Conference Notes Practice Area,” including the popular Q&A Picnic with Corp Fin Director Alan Beller. Many of the questions answered by Alan deal with the new ’33 Act reform.

Controversial Executive Compensation Bill Introduced

As I blogged Thursday, the Democratic leaders of the House – led by Rep. Barney Frank – have introduced “The Protection Against Executive Compensation Abuse Act.” Here is a copy of the bill – and here is a summary (and here is a quasi-white paper issued by the House Democrats).

This Act would amend Section 16 of the ’34 Act that would require companies to:

1. Include an “Executive Compensation Plan” on the ballot for shareholder approval – This Executive Compensation Plan would to be included as part of the company’s proxy materials, which would disclose:

– Tally Sheets– Tally sheet-type information for top executives (the number of executives covered vary depending on the total assets of the company);

– Compensation Policies – Compensation policies for top executives, including the short- and long-term performance targets that are used to determine compensation (and whether such targets were met in the preceding year); and

– Clawback Policy – Company’s policy for clawing back compensation not disclosed in the company’s Executive Compensation Plan; incentive compensation or bonuses within 18 months of a negative restatement; or compensation if the executive was engaged in fraud.

2. Require shareholder approval of golden parachutes – As part of any merger or acquisition, companies would need to receive shareholder approval of any additional compensation for top executives that coincides with the sale or purchase of substantial company assets.

3. Require companies to include simple and clear disclosure of their compensation arrangements on their websites – “Rather than forcing shareholders to regularly monitor and decipher the SEC’s arcane “EDGAR” database.” That’s a Congressional zinger on EDGAR.

What Does This Executive Compensation Bill Really Mean?

First and foremost, this bill shows that predictions of CEO pay becoming a political football have been proven to be true. Even if this bill doesn’t go anywhere – and I don’t expect it to go far – we should expect more of the same from the Hill leading all the way up to 2008.

As for the confusing concept of having shareholders approve disclosure – but not the substance of compensation arrangements – we can look at what is happening in the United Kingdom. In the UK, for the past several years, shareholders have been able to vote on the disclosure made in compensation committee reports (interesting, the only time one has been voted down was due to the mere existence of a CEO employment contract – which is an unacceptable practice in the UK, but is fairly routine here in the US).

The shareholder votes on compensation disclosure in the UK are non-binding – but the message delivered by them can be ignored only at management’s peril. I believe this is the concept that the House Democrats are driving at by requiring shareholder approval of the disclosure regarding a company’s “Executive Compensation Plan.”

As for shareholder approval of severance arrangements and forcing companies to adopt policies on clawbacks – here the House Democrats target two areas where investors have been noticeably angry and the subject of quite a few shareholder proposals during the past few proxy season. Both of these areas were addressed by panels in the just-concluded “2nd Annual Executive Compensation Conference.”

The bottom line is that boards and managers should get their “house” in order regarding executive compensation or run the risk that Congress eventually will take action. And as you can see from this new bill, that is not something that many are gonna like.