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Dodd-Frank Rules On Compensation Committees Now In Place

Merrill Disclosure Solutions | September 17, 2013

Dodd-Frank implementation moves ahead. Implementation of the 2010 Dodd-Frank Act is spread over a number of years. New requirements in effect July 2013 deal with compensation and governance matters, particularly with regard to disclosures relating to the independence of board members, compensation committees, and advisors. The stock exchanges must now require listed companies to have compensation committees composed of independent directors, attorney Mark Borges explains. Committee members must assess the independence of any advisors that the committee hires, and the advisors' tasks and compensation must be disclosed. Interestingly, the advisors to the compensation committee need not be independent, but any conflicts of interest must be disclosed. Few compensation committees have thus far hired their own legal counsel, but these outside consultants will be treated in the same fashion.

Rules in effect now. Companies need to establish policies and procedures to monitor, evaluate, and update their assessments of independence and conflicts of interest. Conceptually, operationalizing potential conflicts and keeping abreast of possible changes in circumstance may pose some difficulties in the initial implementation. Issuers can delay full compensation-committee independence until the first annual meeting in the first 10 months of 2014, the author points out, although the other requirements of this implementation stage are in force sooner. The compensation committee advisor/consultant conflict disclosures took effect at the beginning of 2013, and most others applied on July 1st.

Not as easy as it sounds. Although the requirement to examine independence and conflicts of interest sounds simple, it is difficult to accomplish, given all the permutations of what might constitute a conflict of interest for various parties. In addition to allowing enough preparation time, companies must also be sure that they budget adequate resources to collecting and reporting the required information. Develop a standardized questionnaire, the author advises, for directors and officers as well as for various consultants, encompassing a broad range of conflicts with the company itself, subsidiaries, business partners, top management, and certain categories of business and personal relationships. Some companies voluntarily adopted these requirements in advance of final implementation. Rather than simply stating any conflicts that may exist, the early adopters generally made affirmative statements that conflicts of interest do not exist.

The referenced working paper, Acting Now: How To Deal With The New Compensation Committee & Committee Adviser Independence Requirements By: Mark Borges, published by Executive Press, PO Box 21639, Concord, CA 94521-0639. To subscribe, call (925) 685-5111; or visit

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