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The current corporate management requires that stakeholders must establish the directors’ remunerations. Companies’ executives are likely to overpay themselves directly or indirectly due to management power (Anand, 2011). However, directors have a legal duty of enhancing ethical affiliation or trust between the shareholders and the company. This duty of directors is a fiduciary duty intended to safeguard the company’s interest. The Dodd Frank Act is corporate provision act that permits shareholders to determine the compensation of their executives. Large corporations employ the compensation committee to assess and decide on the executive directors. There are various perspectives towards the Dodd Frank Act according to critics and supporters. The critics of this Act argue that it is an intransigent and promotes management backwardness, whereas the supporters view it as a tool to reduce director’s powers. This Act provides a democratic way, through voting, of determining salaries of the directors. This paper reviews the provisions, impacts, and the purpose of adopting it.
Provisions of the Dodd Frank Act
The Dodd Frank Act stipulates that a non-binding shareholder should vote at least once every three consecutive years to consent or disapprove the offered compensation and disclose in the understudy statement (Anand, 2011). Moreover, for every six years, a shareholder must cast his ballot to permit him /her to compel a say on pay vote frequently. The acquisition of a Stockholder’s disapproval does not serve to nullify any former compensation actions, including the violation of the provisions of fiduciary duties or demand a return of compensation. On the other hand, it is essential for shareholders to present their views to the boards and the compensation commission. This is preferred for the case of large companies that employ mass voting for deciding on the compensation of their directors (Rezaee, 2011). This act does not always guarantee a favorable Say-On-Pay. The Dodd Frank Act also demands that non-binding consultative vote concerning the agreement of payment be initiated by a merger or else acquisition. The consultative vote is disjointedly petitioned in association with transaction vote or no petitions if the arrangements were binding to the former Say-on-Pay.
The Dodd Frank Act is implementable to all yearly meetings that transpire after six months of ratification of the Act. Shareholder’s approval probably demands that the compensation board must contact institutional stockholders beforehand. This is done by sending proxy declaration implying that the disclosure of Say-On-Pay vote depends on the future assurances on changes provided to institutional stockholders by compensation commission. Coordination is primary in the communication between management and compensation committee (Rezaee, 2011). Additionally, the proxy solicitor, compensation committee consultant and investor relations should conform to securities legislation stipulations with regard to support from legal counsel.
Impacts of the Dodd Frank Act to Companies
The Dodd Frank Act has increased the degree of shareholder participation in the management of companies (Rezaee, 2011). During the understudy season, compensation and compensation concern were ways through which a company could understand the essentiality of recognizing shareholder’s views and policies. Companies have to decide on when to meet shareholders each year. The involvement of shareholders during the voting process incorporates them in the management process of the firm since they have to make decisions on whether to approve or disapprove the specified compensation to directors (Anand, 2011).
The Act has led to advanced disclosure, which has imposed significant influences on companies’ perceptions towards Compensation Discussion and Analysis (CD&A). Firms are using CD&A as a tool for offering a comprehensible business grounds for directors’ decisions regarding their compensation, rather than regarding it as a conformity exercise. Majority of the firms preferred a covered scheme to the proxy disclosure outlining major program characteristics and similarities between pay and performance formerly in their CD&A.
Another impact allied to the Dodd Frank Act is the underpinning of stockholders alliance with performance orientation through stock ownership and clawbacks strategies. Under clawbacks, the Act demands that companies must improve their standards beyond their present stipulations. Research reveals that 34 companies have already complied with these provisions among the 80 companies that moved to disclose their clawbacks provisions. Notably, various firms have opted to expand their list of directors and items with regard to clawbacks provisions for larger group of directors.
The core purpose of the Dodd Frank Act is to control the compensation of the directors by stockholders since they are liable to overpay themselves because of management power. The Act reduces these powers, thus denying them the authority of allocating salaries to themselves even when they have underperformed. It gives the stockholders the rights to decide on compensation through voting basing on the performance of the executive (Rezaee, 2011). In addition, the Act intends to minimize non-performance elements such as tax gross-ups and executives perquisites, which are perceived to be detrimental by institutional shareholders.
The Practicing Law Institute (2010) affirmed that the United States President signed the Act to a law to serve its official purpose, which is to enhance financial immovability of the United States through emphasizing transparency and accountability in the United States financial system. Other related purposes of the Act include safeguarding American taxpayers by terminating post security and shielding consumers from foul financial behavior. As such, this Act stands to have an effect on various industries and legislations integrating correction to current laws and legislating new laws (Practising Law Institute, 2010).
From a personal point of view, the Dodd Frank Act provides a suitable tool or strategy for managing companies. The Act helps to increase the performance of the executives, implying that should be integrated with the management of firms. It involves shareholders in the actual management of firm though voting that is perceived as a decision-making process. The benefits of this Act are far much beyond any scrutiny and should be implemented as fast as possible.
In conclusion, the Act entails voting of non-binding shareholder for at least three successive years to approve directors’ compensation, and it is applicable to all yearly meetings six months after the enactment. It affected companies by increasing shareholders involvement and emphasizing shareholders alliance with performance orientation. The enactment of Dodd Frank’s Act aimed at enhancing financial stability of the US and controlling the compensations of directors.