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# Legislative Bulletin.......................................\...............April 18, 2007

**Contents:**

**H.R. 1257**---Shareholder Vote on Executive Compensation Act

H.R. 1257---Shareholder Vote on Executive Compensation Act

(*Rep. Frank, D-MA*)

**[Order of Business]{.underline}**: The bill is scheduled to be
considered on Wednesday, April 18^th^, subject to a modified open rule,
making in order only those germane amendments pre-filed in the
*Congressional Record* by the close of business on April 17, 2007. The
RSC will summarize pre-filed amendments in a separate document.

**[Summary]{.underline}**: H.R. 1257 would amend the Securities Exchange
Act of 1934 (15 U.S.C. 78n) to require that shareholders of public
companies be given an advisory vote on the compensation of company
executives.

Specifically, the bill would require that any proxy, consent, or
authorization for an annual or other shareholders meeting occurring on
or after January 1, 2009, permit a separate shareholder vote to approve
the compensation of executives (as disclosed pursuant to the Securities
and Exchange Commission's---SEC---compensation disclosure rules). The
shareholder vote would [not be binding]{.underline} on the board of
directors and could not be construed as overruling a decision by such
board, or as creating or implying any additional fiduciary duty by the
board. Furthermore, the vote could not be construed as restricting or
limiting the ability of shareholders to make proposals for inclusion in
such proxy materials related to executive compensation.

Additionally, H.R. 1257 would require that, in any proxy solicitation
material for an annual or other shareholders meeting occurring on or
after January 1, 2009, that concerns an acquisition, merger,
consolidation, or proposed sale or other disposition of substantially
all the assets of an issuer (i.e. a public company), the person making
such solicitation disclose in the proxy solicitation material (in a
"clear and simple form," as determined by SEC regulations) any
agreements that such person has with any of the company's (or the
acquiring company's) principal executive officers regarding any
compensation (whether present, deferred, or contingent) that relates to
the acquisition, merger, consolidation, sale, or other disposition, and
that has not been subject to a shareholder vote above. \[Such
compensation is commonly known as "golden parachute" compensation.\]

The proxy solicitation material containing the golden parachute
compensation disclosure would have to require a separate shareholder
vote to approve such compensation. As above, this shareholder vote would
[not be binding]{.underline} on the board of directors and could not be
construed as overruling a decision by such board, or as creating or
implying any additional fiduciary duty by the board. Furthermore, this
vote could not be construed as restricting or limiting the ability of
shareholders to make proposals for inclusion in such proxy materials
related to executive compensation.

The SEC would be required to issue final regulations regarding these
provisions above within one year of the enactment of this legislation.

**[Additional Background]{.underline}**: According to the Business
Roundtable, many companies have voluntarily shifted to a system of
majority voting for members of boards of directors. Currently 52% of the
S&P 500 have adopted some form of majority voting, up from 20% last
year. Additionally, the results of a 2006 Business Roundtable corporate
governance survey of

its members reported that 85% of its company boards are composed of at
least 80%

independent directors (i.e. directors with no business, employment,
charitable, or personal relationship with the company or its
management).

<http://www.house.gov/apps/list/hearing/financialsvcs_dem/htcastellani030807.pdf>.

**[RSC Bonus Fact]{.underline}**: The Bureau of Economic Analysis
released data last year showing that the average annual compensation
(wages plus benefits) for federal civilian workers in 2005 was
\$106,579---twice the average compensation paid in the U.S. private
sector: \$53,289. Excluding benefits, the average federal civilian
worker earned \$71,114 in 2005, 62% more than the average private-sector
worker, who made \$43,917. Since 1990, average compensation for federal
workers has increased by 129%, according to the Bureau of Economic
Analysis, compared to 74% for private-sector workers over the same
timeframe. <http://www.cato.org/pub_display.php?pub_id=6611>.

**[Committee Action]{.underline}**: On March 1, 2007, the bill was
referred to the Financial Services Committee. On March 21^st^ and
28^th^, the committee marked up the bill and, on the 28^th^, ordered it
reported to the full House by a vote of 37-29.

**[Possible Conservative Concerns]{.underline}**: Some conservatives may
regard this legislation as a federal intrusion into business matters
that are currently governed by the states. That is, company organization
and structure is governed by state law, while federal securities laws
generally govern the disclosure of information to investors.

Some conservatives may believe that, since corporations are private
entities designed to generate value for their shareholders, it is not
the federal government's proper role to intervene and tell such
corporations when their shareholders can vote on issues and when they
can not (regardless of whether such vote is binding). Private-market
pressures should determine (and have determined) whether executive
compensation is too high or too low. Some public companies (such as
Aflac) have voluntarily implemented nonbinding shareholder voting on
executive compensation, but many conservatives believe that taking such
steps should not be dictated by the federal government.
<http://www.house.gov/apps/list/hearing/financialsvcs_dem/osneugebauer030807.pdf>.

Further, some conservatives may believe that the issue of executive
compensation is best handled by boards of directors. Shareholders elect
the directors and otherwise participate in other significant actions
(like approving mergers), but they do not run the operations of
companies.

Additionally, some conservatives may believe that this legislation could
lead to a slippery slope of demands for shareholder votes on other
significant corporate matters normally reserved for boards of directors,
such as marketing plans and capital investments.

**[Administration Position]{.underline}**: A Statement of Administration
Policy (SAP) is forthcoming but was not available at presstime.

**[Cost to Taxpayers]{.underline}**: CBO estimates that "implementing
H.R. 1257 would cost about \$1 million in 2008 to develop regulations,
and less than \$500,000 per year thereafter to review and monitor
compliance by companies affected by the regulations."

**[Does the Bill Expand the Size and Scope of the Federal
Government?]{.underline}**: Yes. This bill includes a federal intrusion
into private-sector business matters that are currently governed by the
states.

**[Does the Bill Contain Any New State-Government, Local-Government, or
Private-Sector Mandates?]{.underline}**: Yes, the bill contains two
private-sector mandates requiring shareholder voting. CBO notes,
however, that "the cost to comply with those mandates would fall below
the annual threshold established by UMRA (\$131 million in 2007,
adjusted annually for inflation)."

**[Does the Bill Comply with House Rules Regarding Earmarks/Limited Tax
Benefits/Limited Tariff Benefits?]{.underline}**: The Financial Services
Committee, in House Report
[110-88](http://thomas.loc.gov/cgi-bin/cpquery/R?cp110:FLD010:@1(hr088)),
asserts that, "H.R. 1257 does not contain any congressional earmarks,
limited tax benefits, or limited tariff benefits as defined in clause 9
of rule XXI."

**[Constitutional Authority]{.underline}**: The Financial Services
Committee, in House Report
[110-88](http://thomas.loc.gov/cgi-bin/cpquery/R?cp110:FLD010:@1(hr088)),
cites constitutional authority in Article I, Section 8, Clause 1
(relating to the general welfare of the United States) and Clause 3
(relating to the power to regulate interstate commerce).

**[Outside Organizations]{.underline}**: The American Federation of
State, County, and Municipal Employees (AFSCME), the largest union
within the AFL-CIO, is [supporting]{.underline} this legislation.
<http://www.house.gov/apps/list/hearing/financialsvcs_dem/htferlauto030807.pdf>.

The Business Roundtable is [opposing]{.underline} this legislation.
Before the Financial Services Committee, the Roundtable's President,
John Castellani, offered the following assessment, among others:
"Business Roundtable believes that the best people to set executive
compensation and hold CEOs accountable for company performance are the
independent members of a company's board of directors, acting upon the
recommendations of their compensation committees. These committees are
subject to strict independence requirements, and all directors are
strictly accountable to all shareholders." Further, the Roundtable
notes: "Unlike democracies, shareholder rights vary based upon the size
of their investment, and by definition corporate decision making is not
a democratic process."

The Roundtable also argues that "requiring a shareholder vote on
compensation -- even an

advisory vote -- would seriously erode critical board responsibility.
Determining compensation

involves several factors: company goals, specific performance metrics,
and amounts negotiated

under the terms of an employment contract. It would be difficult to
effectively subject some or

all of these elements to a voting process."

<http://www.house.gov/apps/list/hearing/financialsvcs_dem/htcastellani030807.pdf>.

The *Wall Street Journal* ("How Borrowed Shares Swing Company Votes"),
on January 26, 2007, reported on extensive problems with shareholder
proxy voting, especially in regards to private investment funds
borrowing shares of public companies and swing vote outcomes.

**[RSC Staff Contact]{.underline}**: Paul S. Teller,
<paul.teller@mail.house.gov>, (202) 226-9718