Regulatory Changes for Top U.S. Companies Produce New Corporate Governance, Compensation Priorities

Shearman & Sterling's Ninth Annual Corporate Governance Surveys Released

Oct 12, 2011, 11:48 ET from Shearman & Sterling LLP

NEW YORK, Oct. 12, 2011 /PRNewswire/ -- A little more than a year has passed since US public companies first experienced the brave new world of regulatory reform created by the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. But the annual analysis of corporate governance and compensation practices of US public companies by global law firm Shearman & Sterling suggests that these companies were generally well prepared for the regulatory changes and have spent the year fine-tuning their policies and practices to adjust to the new rules.

"While the new rules have created dramatic changes in the way that US public companies must operate, there was definitely a collective sigh of relief that the uncertainty had finally turned into relative clarity once the rules were finalized," says Stephen Giove, a Shearman & Sterling partner and co-director of the firm's corporate governance surveys. "We are still in a period of serious fine-tuning, with specific guidelines still coming from various government entities, but most companies have taken a 'full steam ahead' approach. It may not be business as usual, but it's the next best thing."

This year's surveys – the ninth annual examination of general governance practices and director and executive compensation practices – are once again based primarily on an in-depth analysis of the 2011 proxy statements of what the firm calls the "Top 100 Companies" (as determined by revenue and market capitalization). These proxy statements were filed months in the months after the passage of Dodd-Frank.

For the first time, the survey this year includes an analysis of 157 companies' selected corporate governance practices in place at the time of their initial public offering. This analysis provides some key insights into possible corporate governance changes within a company life cycle – in this case, from the time it originally goes public.  

"Companies making their initial public offering have to make important judgments about the corporate governance infrastructure and structural defenses, such as whether to have a classified board, they will implement for their public equity market debut," says David Connolly, a Shearman & Sterling partner who advises companies on corporate governance matters. "Our survey provides an opportunity to assess these practices against those of the Top 100 Companies and to understand which of these practices may draw positive or negative attention of institutional investors over time."

Taken all together, Giove said, this year's analysis shows the continued importance and influence of institutional investors on general corporate governance and also on director and executive compensation.

"There is no question that, as we look back at our previous surveys over the past nine years, we see this increased activist role among institutional investors," Giove says. "It is unmistakable and very important."

"Similarly, on the compensation side," adds Doreen Lilienfeld, an executive compensation partner and co-director of the surveys at Shearman & Sterling, "we are seeing a significant outcome from Dodd-Frank and other regulatory activity: a clear commitment to greater transparency and, especially, increased communications with shareholders. Mandatory say-on-pay guidelines have led to the widespread use of the CD&A as the means to communicate executive pay strategy and practice to shareholders. This is a very significant transformation."

Key corporate governance findings include: 

  • Majority voting is becoming the rule rather than the exception. Since 2006 there has been a dramatic increase in the number of companies that use a majority voting standard – from 11 companies in 2006 to 85 of the Top 100 Companies in 2011.
  • Thirty-three of the Top 100 Companies assign primary risk oversight responsibility to one board committee – overwhelmingly, the audit committee (26 companies). There was also a dramatic increase in the number of companies that had management risk committees in place – 23 companies, up from 9 just a year ago.
  • As required by new regulation, all of the Top 100 Companies disclosed why they have determined that their current leadership structure – that is, company and board leadership – is appropriate.  According to Shearman & Sterling's analysis, 27 of the Top 100 Companies split the chair of the board and CEO positions – roughly the same number as a year ago.
  • The downward trend of companies with a classified or staggered board continued. Today, 15 of the Top 100 Companies have a classified or staggered board, down from 20 a year ago and way down from 54 back in 2004.

On the executive compensation side, the survey reflects a year of transition for the Top 100 companies. Say-on-pay solidified the role of the proxy statement – particularly the compensation discussion and analysis (CD&A) – as the primary vehicle for the company to explain executive pay to investors. Many issuers, including a majority of the Top 100 Companies, refined their compensation disclosures to better explain the compensation process and effectively serve as a supporting statement for their say-on-pay votes.

All in all, the analysis clearly showed that the Top 100 companies modified certain elements of their compensation programs in 2011 to align them more closely with good governance practices, such as the use of stock ownership and stock retention guidelines, the elimination of tax gross-ups, greater linkage between pay and performance and a movement toward "double-trigger" change-in-control benefits.

"The post-Dodd-Frank period was one of real change," Shearman & Sterling's Lilienfeld says. "For example, of the 88 companies that held say-on-pay votes in 2011, these resolutions were passed in all but two and with an overwhelming support from shareholders with an average approval rating of over 90 percent."  

Other key findings include:

  • The Dodd-Frank Act permits shareholders to make a non-binding recommendation on the frequency of the say-on-pay votes every one, two or three years. Shareholders at 80 of the Top 100 companies approved annual voting.
  • There was a significant increase in the influence of proxy advisory firms. In particular, Institutional Shareholder Services (ISS) and Glass Lewis & Company (Glass Lewis) carefully analyzed the alignment between CEO pay and company performance.
  • In 2010, shareholders at 3 of the Top 100 Companies voted down the executive compensation packages. Following changes to these packages this past year, the say-on-pay proposals passed at each of these companies in 2011, with approval ratings of greater than 85 percent.

The survey is available on request from Shearman & Sterling's web site at or at the survey site at The survey is also available, for the first time, in digital format and via mobile Apps from the iTunes Store and the Android Market.


Shearman & Sterling LLP is a global law firm with approximately 900 lawyers in 20 offices in 12 countries around the world. The firm is a leader in mergers and acquisitions, capital markets, financial regulatory, project development and finance, complex business litigation and international arbitration, asset management and tax.  

Ron Brandsdorfer, Shearman & Sterling, New York
Gaston Terrones Dimant, Edelman

SOURCE Shearman & Sterling LLP