I got an email from a Wall Street corporate lawyer who wrote that:
I'm reading your article on Dodd-Frank and quack corporate governance. I think there's an error in your discussion of section 952 (section II.A.1 of your article). Congress did in fact mandate the use of independent comp committees at listed US companies. The listing exchanges already require independent comp committees; the effect of section 952 is to federalize the independence tests much like SOX (section 10A) federalizes the test for audit committees. The likely result is that someone who meets the exchange director independence standard even though he or she is a significant shareholder (above 10%) may nevertheless be barred from the comp cmte, just as he or she would presumptively be barred from the audit cmte.
The article to which he refers is Dodd-Frank: Quack Federal Corporate Governance Round II. The relevant passage states (at p. 18):
Congress chose not to mandate the use of board-level compensation committees, but it seems reasonable to assume that Congress intended the mandated disclosure to shame companies into using such committees “voluntarily.”
As I read section 952, it does not explicitly require companies to have compensation committees, but only requires that those companies that do must have fully independent committees. Here's the relevant language, parsed of exceptions:
The Commission shall, by rule, direct the national securities exchanges and national securities associations to prohibit the listing of any equity security of an issuer ... that does not comply with the requirements of this subsection.
Nothing in the section goes on to mandate expressly the use of compensation committees. Instead, it says that a compensation committee must be independent.
The key issue here, of course, is for NASDAQ companies. NASDAQ listing standard 5605(d) requires executive officer compensation decisions to be made by independent directors. Under the rule, this can be done either by a majority of the independent directors, or by a committee comprised solely of independent directors. If the company chooses to rely on a vote of a majority of the independent directors, the independent directors must meet alone to make these decisions, such as during the executive sessions of independent directors. As I understand 952, it would not require a company making use of this option to create a compensation committee. Or am I missing something?
Google research was unhelpful. A lot of sites claim flatly that 952 requires the use of independent compensation committees. Dorsey & Whitney lawyers Thomas Martin and Kimberley Anderson, for example, opine that "Section 952 of the Act requires the SEC to adopt, on or before July 16, 2011, a rule that will prohibit the listing of issuers that do not have independent compensation committees." But King & Spalding lawyers Kenneth Rasking and Laura Westfall opine that "Section 952 does not require companies to have compensation committees, but does require existing compensation committees to meet its “independence” criteria," which is how I read it. A Paul Weiss client memo states that "While the Act does not require companies to have compensation committees per se (meaning, for example, that NASDAQ companies that do not have compensation committee structures may be able to continue that practice pending further rulemaking from the exchange), those companies that do must have fully independent committees," which again is how I read it.
