It shouldn’t come as a surprise to anyone nerdy enough to be reading this blog that the Dodd-Frank Act mandated SEC rulemaking in four areas relating to the disclosure of executive compensation:
- pay ratio,
- clawbacks, and
- pay-for performance.
These items have been variously referred to as the “four horsemen” (as in apocalypse) or the “gang of four” (as in Chairman Mao’s evil wife and her evil friends).
Up until now, the SEC has been moving at a rather leisurely pace to get the horsemen – er, rules – out. In fact, the SEC’s failure to adopt final pay ratio disclosure rules has generated some criticism (see my recent UpTick). Perhaps for that reason, the SEC seems to be moving forward to propose the remaining rules at a somewhat faster pace. Just about 10 weeks ago, the SEC proposed rules on hedging.
And now the SEC has scheduled an open meeting on April 29 at which it will consider proposing rules for pay-for-performance disclosure. You can find the SEC’s Sunshine Act notice of this meeting here. It’s anyone’s guess what the proposed rules will look like, but the proposals will definitely generate lots of interest. So, for the time being, all I can suggest is “watch this space.” We’ll let you know once we have a chance to see what emerges from the open meeting.
On Sunday, April 12, the Business section of the New York Times led with an article by Gretchen Morgenson taking the SEC to task for not having adopted rules requiring disclosure of CEO pay ratios. This follows similar complaints by members of Congress, most recently in the form of a March letter by 58 Democratic congressmen to Chair White. And going further back – specifically, to Chair White’s Senate confirmation hearing in March 2013 – Senator Warren told Chair-Designate White that SEC action on this rule “should be near the top of your list.”
I’ve given this a great deal of thought since Congress mandated pay ratio disclosure in the Dodd-Frank Act, and I’ve yet to figure out why – aside from political considerations – so many people think this disclosure is so important or what it will achieve. In fact, when I coordinated a comment letter on the rule proposal as Chair of the Securities Law Committee of the Society of Corporate Secretaries and Governance Professionals, I told a number of people that it was the hardest comment letter I’d ever worked on, and I believe that was the case because it was hard to comment on a proposal that struck and continues to strike me as ill-advised and unnecessary in its entirety.
Ms. Morgenson’s article proves my point. It provides pay ratio data for a number of companies, as determined by a Washington think tank. But at the end of the article, all the data demonstrate is that the CEOs of the companies in question make a ton of money. The ratios don’t tell us anything more than that; Disney had the highest ratio, but does anyone need a ratio to know that its CEO makes lots of money? Ditto Oracle, Starbucks and the others – in all cases, the ratio is far less informative than the dollar amounts, which of course are and have for many years been disclosable.
The ratios might – but only might – be more meaningful if we knew what the underlying facts are; for example, what is the mix of US to non-US employees? To what extent are the employees part-time or seasonal? But of course the article doesn’t reveal this information, and neither would the proposed SEC rules. And the SEC Staff has indicated the final rules are not likely to allow companies to exclude non-US, part-time or seasonal employees. In other words, we won’t be able to distinguish between two companies with the same pay ratios regardless of the fact that one may have vast numbers of employees in the third world while the other’s employees are located in major industrialized countries.
Britney Spears has nothing on Institutional Shareholder Services, better known as ISS. ISS is rolling out proposed new voting policies for the 2015 proxy season. ISS often uses more words to tout how transparent it is than to explain its voting policies clearly, and the draft policies being considered for 2015 are no different.
One new proposed policy addresses voting on shareholder proposals on independent board chairs. ISS proposes to expand the list of factors that will be considered in developing a voting recommendation and to look at these factors in a more “holistic” manner. (The current policy is to support the proposals unless the company meets all of the criteria.) So this seems like a good thing. However, ISS indicates that the new policy is not expected to change the percentage of independent chair proposals that it will support. The obvious question is, then, how will the new policy really work? Your guess is as good as mine (which frankly isn’t very good).
The other new proposed policy provides additional information regarding the “scorecard” that ISS will use to evaluate equity plans. Like the independent chair policy above, some more criteria are laid out, but it’s impossible to tell how the factors – or, indeed, the new scorecard, will be weighed or will work – thus assuring that companies seeking shareholder approval of equity plans will have to continue to use ISS’s consulting service to find out whether a new plan will pass muster.
I could just as easily have referred to Yogi Berra as to Britney Spears, because if this isn’t déjá vu all over again, I don’t know what is.