Although you may have missed the fireworks and the parade, we celebrated the one year anniversary of the JOBS Act on April 5th. Of course you wouldn’t have been alone if you missed the big celebration because, unfortunately, despite the initial hype surrounding the JOBS Act, not much has happened. The media has chastised the JOBS Act for not fulfilling its early promise. Most of the innovative provisions of the JOBS Act remain unimplemented by the SEC such as the relaxation of the ban on general solicitation on private offerings, crowd funding, and the improvement to Regulation A. But even Title I (generally referred to as the “IPO on Ramp”), which was effective over a year ago, hasn’t had much effect. In fact, IPOs, according to Jay Ritter at the University of Florida, have actually decreased for the so-called emerging growth companies.
How can this be? While there can be numerous factors for why IPOs continue to remain elusive (costs of regulation and a poor economy are the top factors), other factors such as a rising stock market and pent up demand for IPOs should be compelling companies to go public. Or is it possible that the cost of regulation that has been piled on since the fall of Enron trump everything else?
When Congress passed Title I of the JOBS Act, Congress recognized that public companies have been facing increased burdens for being public. Although the causal relationship was suspect at best, Congress determined that over regulation was responsible for the severe drop off in IPOs from the 1990s through the 2000s. While I might suggest that the dotcom bubble bursting may have played a part in the decrease in IPOs, I would agree that the unrelenting regulation that has come out of Congress over the past decade (Sarbanes-Oxley, Dodd-Frank) as well as rulemaking from the SEC itself (executive compensation disclosures) must have had some effect.
As a reminder, Title I of the JOBS Act, among other things, reduces executive compensation disclosures. Specifically, emerging growth companies (companies with less than $1 billion in revenues) are exempt from holding “Say-on-Pay” and “Say-on-Golden Parachutes” votes, disclosing the two controversial executive compensation pay ratios required under Dodd-Frank, and providing a Compensation Discussion and Analysis (CD&A). Other executive compensation disclosure is also shortened by reducing the number of named executive officers, reducing disclosure from three to two years, and eliminating certain compensation tables. In other words, Title I of the JOBS Act was designed to address over regulation of executive compensation for public companies.
While this was a great start by Congress, companies haven’t taken advantage of Title I because of the stigma of being seen as a smaller, unsophisticated public company. Thus, for Title I to be effective, the relief provided by Title I needs to be expanded to all companies and the regulatory relief needs to be made permanent rather than sun setting after a maximum of five years. Yes, the SEC has a three part mission: protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation, but does extensive executive compensation disclosures actually protect investors or does it merely cause a company to spend a lot of time and money on consultants and attorneys to justify what they were already planning to pay their executives anyway?
The average investor (well, the average investor who actually reads a proxy statement) typically reads the letter to the shareholders and then flips to the Summary Compensation Table to see how much the CEO made. Very little attention is given to the 25 page CD&A, yet public companies must produce these documents each year. While it is true that institutional investors and larger shareholders may spend time reading through the CD&A, does it even make sense for shareholders to have a direct say (even if merely advisory) on a role that has been historically resided with the Board of Directors? Proponents argue that a CD&A and the Say on Pay vote is critical because Boards of Directors have failed to rein in executive compensation pay and therefore shareholders need to be empowered. Such an argument, is of course a slippery slope because, under that analysis, shareholders should also then be given advisory votes on things such as related person transactions, charitable donations, significant expenditures, etc.
Yes, these disclosure rules have had a positive effect on curbing some real and some perceived executive compensation practices, particularly golden parachutes, perquisites, and just plain excessive compensation. But executive compensation hasn’t actually been reduced by implementing these rules. Rather, executive compensation has increased and we all have a better understanding of why executive pay increases each year.
For smaller companies, added costs to prepare excessive executive compensation disclosures that neither help curb abuses nor are relevant (or read) by most investors are simply not worth it. For larger companies, the added expense, while not excessively burdensome, can be more effectively used by reinvesting in their business. Congress or the SEC should work to reduce the executive compensation disclosures identified in the JOBS Act. Meanwhile, shareholders should invest in companies with good market returns and forget about trying to evaluate exeuctive compensation practices.