8. The Impact of Recent Corporate Governance Changes on
Executive Compensation

An executive compensation reference work would be incomplete
today without a review and discussion of current and anticipated
changes in corporate governance. There is general agreement that too
many key governance processes and activities have been handled
with insufficient formality in the past—not necessarily causing, but
allowing for abuse, and in some cases leading to fraud.

The context for this chapter is drawn largely from three
important new sources of regulation and guidance: the Sarbanes-
Oxley Act of 2002, and the proposed New York Stock Exchange and
NASDAQ listing standards (still largely under review by the SEC).
The authors begin by identifying the areas most likely to change in
corporate governance, including strengthening the role of the board,
redefining what it means to be an independent director, and giving
shareholders a more direct say in a larger number of governance
activities. These change areas logically impact how directors are
selected and how they do their work. The chapter also details a
number of suggested and/or mandated changes involving areas such
as director qualification criteria, annual performance evaluations,
and committee charters.

The reader will see this information as fitting into the executive
compensation context in two important ways. First, there are a
number of specific executive compensation rule changes or prohibitions
including a prohibition on most executive loans and an
acceleration in SEC reporting for certain executive compensation
actions. Additional changes are possibly forthcoming related to deferred
compensation, stock, and certain retirement plans. Second, the executive
compensation professional must work together with other
professionals from the law, audit, tax and compliance groups to
establish a stronger set of processes and cross-checks to minimize or
eliminate the potential for possible malfeasance.

Corporate governance will continue to change in the years
ahead. The compensation professional must fully embrace and
understand these changes if they are to be effective in the design and
administration of the company’s executive compensation programs.
—Editors



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