As we approach the end of 2018, it’s only natural to look back on some of the year’s events – and some non-events.  For my money, one of the most significant non-events was the inauguration of CEO pay ratio disclosure, one of the evil spawn of Dodd-Frank.

In the interest of brevity, I’ll skip the background of the disclosure requirement, except to say that it seemed intended to shame CEOs – or, more accurately, their boards – into at least slowing the rate of growth in CEO pay.  Some idealists may have actually thought that it would lead to reductions in CEO pay.  Poor things; they failed to realize not only that all legislative and regulatory attempts to reduce CEO pay have failed, but also that such attempts have in every single instance been followed by increases in CEO pay.

So the 2018 proxy season, and with it pay ratio disclosures, came and went.  Sure, there were media outcries about some of the ratios, but they failed to generate any traction.  Companies may have incurred significant monetary and other costs to develop the data needed to prepare the disclosures, but their concerns about peasants storming the corporate gates with torches and pitchforks proved needless.  Few, if any, investors – and certainly no mainstream investors – seemed to care about the pay ratios.  Employees making less than the “median” employee didn’t rise up in anger.  Even the proxy advisory firms seemed to yawn in unison.

So that’s that.  Or so you’d think.

Continue Reading To pay ratio advocates, nothing succeeds like excess

Photo by Alyse & Remi

Possibly lost in the heat of summer and the false narrative that the Economic Growth, Regulatory Relief, and Consumer Protection Act had somehow repealed the Dodd-Frank Act, the recent Act, which was signed into law on May 24th, has a few provisions impacting the securities laws.  None of these are complete “game changers,” but all could assist earlier stage companies:

  • Investment Company Act. Venture capital funds that have less than $10 million in capital contributions are now deemed to be “qualifying venture capital funds.”  Qualifying venture capital funds can now have up to 250 investors (rather than 100) to remain exempt from being subject to the Investment Company Act of 1940.  This may have the effect of lowering the minimum investment amount in a fund, which may entice more investors to invest in funds.
  • Rule 701 Exemption. Private companies can rely on Rule 701 as a registration exemption to adopt stock option and stock purchase programs for employees, consultants, and advisors.  In any 12-month period, an eligible issuer can issue an amount of securities that is the greater of (i) $1 million; (ii) 15% of the issuer’s total assets; or (iii) 15% of the outstanding securities of the class being issued.  As long as the amount of securities sold during any 12-month period is less than $5 million, the issuer needed to only provide a copy of the compensatory benefit plan to employees, consultants, and advisors.  For larger private companies, the $5 million ceiling was easily exceeded, which then triggered much more burdensome disclosure requirements.  The recent Act increases that disclosure trigger from $5 million to $10 million.
  • Regulation A+. So far issuers and bankers are still warming up to Regulation A+.  I think Regulation A+ will likely become a commonly used registration exemption over the long-term.  The new Act may help.  Previously, issuers that were subject to the periodic reporting requirements under Section 13 or 15(d) of the Securities Exchange Act of 1934 were not eligible to use Regulation A.  The new Act orders the SEC to remove that restriction.

Again, none of these tweaks will by themselves unleash an army of new startups, but we should applaud anytime Congress does anything remotely practical.

Earlier this month, the Federal Reserve proposed changes to its guidance on corporate governance for banking organizations.  The proposals suggest a new approach to corporate governance that could extend beyond the banking industry; among other things, they suggest that boards should spend more time on more important matters, such as strategy and risk tolerance, than on compliance box-ticking. However, taken as a whole, the proposals strike me as being something of a mixed bag.  And some of the positive aspects of the proposals are already being subjected to attacks.

The Good News

The good news is that the Fed seems to be acknowledging that the board’s role is that of oversight and that boards are spending far too much time micro-managing compliance and should focus on big picture items such as strategy and risk.  Those of us who speak with board members know that this has been a significant concern since the enactment of Dodd-Frank.

Continue Reading Federal Reserve governance guidance: the pendulum swings back (?)

waldryano
waldryano

I don’t know when Congress decided that every piece of legislation had to have a nifty acronym, but the House Financial Services Committee recently passed (on a partisan basis) what old-fashioned TV ads might have called the new, improved version of the “Financial CHOICE Act”.  The word “choice” is in solid caps because it stands for “Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs”.

Whether and for whom it creates hope, opportunity or something else entirely may depend upon your perspective, but whatever else can be said of the Act, it is long (though at 589 pages, it is slightly more than half as long as Dodd-Frank), and it addresses a very broad swath of issues.  Here’s what it has to say about some key issues in disclosure, governance and capital formation, along with some commentary. Continue Reading The Financial CHOICE Act – everything you’ve ever wanted, and more?

Pay Ratio in Haiku
Illustration by Tyler Letkeman

As reported by Broc Romanek in his recent blog post, the SEC recently posted five new CDIs related to the CEO pay ratio rules contained in Item 402(u) of Regulation S-K. In order to provide a very brief summary in a fun way, I’ve composed five haikus addressing the substance of each of the newly released interpretations. Enjoy!

 

 

 

 

 

Question 128C.01

A “CACM”
That reasonably reflects pay
Can be utilized

Question 128C.02

Hourly pay rates
Can we use to calculate?
No! These will not work

Question 128C.03

To calculate it
You must use recent data
90-day limit

Question128C.04

Furloughed employees?
You must include them too, but
Use annualized pay

Question 128C.05

What about ICs?
Ignore classification
If you set their pay

Whistleblowers receive protection
Photo by Kai Schreiber

We are pleased to provide a posting from our colleague, Holly L. Griffin, an attorney in Gunster’s Labor and Employment practice group.

Within the course of one week, the SEC took administrative action against two companies for language contained within severance agreements which restricted employee rights to obtain a monetary award for reports of potential law violations to the SEC. The SEC took aim at two types of provisions which commonly appear in severance agreements: the confidentiality clause and the waiver of rights.

Background

In one of the cases, the company required all employees accepting severance pay to sign an agreement that contained a clause prohibiting disclosure of company confidential information and trade secrets, except when the employee is compelled by law to disclose the information.  In the event the employee was required to disclose company confidential information, the agreement required the employee to provide notice to the company.  The SEC determined that the confidentiality agreement put former employees between a rock and a hard place if they wanted to report potential law violations; they could either identify themselves as a whistleblower to the company by providing notice, or risk breaching the agreement and forfeiting severance by disclosing confidential information.

In both matters, the companies required all employees accepting severance to sign an agreement that contained a waiver of rights. Although the severance agreements did not prohibit the employees from reporting or participating in an investigation into a potential law violation, they explicitly prohibited the employees from receiving monetary compensation for such reports.  The SEC found both companies in violation of an SEC Rule which prohibits public companies from taking action which impede a whistleblower from communicating with the SEC regarding possible law violations.  Congress enacted the “Dodd-Frank Act with the stated purpose of encouraging whistleblowers to report potential law violations to the SEC, by offering financial incentives or awards for reports.  The SEC determined that requiring employees to waive their right to financial recovery undermines the public policy purpose behind the Dodd-Frank Act and violates SEC rules.

Both companies were required to notify former employees of the ruling and to pay monetary civil penalties, totaling hundreds of thousands of dollars each. One company was also required to amend its severance agreements to include a section titled “Protected Rights,” which notified employees of the right to report any suspected law violation to a governmental agency and to receive an award for providing such information.

What it means  Continue Reading SEC Attacks Standard Severance Agreements–Companies Would be Well Advised to Take Notice and Adjust Accordingly

My favorite quote of the week seems to have gone largely unnoticed, despite the fact that I tweeted about it and told several people about it. The quote, attributed to former Congressman Barney Frank, was “people expect too much from boards”. If you don’t believe me, you can find it here – in the venerable New York Times, no less.

Am I the only one who thinks that the statement, particularly considering the source, is offensive? Am I the only one who thinks that the co-sponsor of the legislation that bears his name, and the author and/or instigator of many of its provisions that imposed extensive obligations on boards, saying that we expect too much from boards is similar to the child who kills his parents throwing himself on the mercy of the court because he is an orphan?

In fairness to Mr. (no longer Congressman) Frank (not that I feel compelled to be fair to him), he is also quoted to have said that the most important oversight of financial companies comes not from its directors but from regulators. If that’s the case, however, why does the eponymous legislation bother to impose so many burdens on boards? Why not leave it all to the regulators (or would that leave the plaintiffs’ bar in the lurch)? Alternatively, why not expand the concept of mandatory say on pay votes (which the Dodd-Frank Act imposes upon most publicly held companies) to everything a board does and do away with the board entirely? Need a new plant? Put it to a shareholder vote! Want to think about entering new line of business? How about a say on that?

Continue Reading Politician, heal thyself

Pay ratio disclosures
Photo by Brian Talbot

After much foot dragging, I have finished reading the adopting release for the new pay ratio disclosure rules.  Yes, the release is long (300 pages or so), but adopting releases are always long.  The real reason why it took so long is that the whole concept of pay ratio disclosure just seems silly to me (and apparently to Bob Lamm as well) so I just hoped it would go away.

I am not against finding ways to strengthen the middle class.  Just like I am not against ending the sale of certain minerals in Central Africa that end up funding deadly conflict.  The problem I have is that public companies should not have to bear the complete burden of fixing social ills.  Less than 1% of the 27 million companies in the United States are publicly traded.  And there are plenty of private companies that are larger than most publicly traded companies.  Thus, while we may not agree whether the social goals are worth achieving, I think we can all agree that there are better ways to achieve them than selective enforcement (particularly since the SEC itself has said that the pay ratio will not be comparable from one company to another).  The Securities Edge  has been criticizing the social disclosure movement for some time, but we haven’t yet seemed to have stopped Congress from continuing to go down that path.

So, unless Congress acts to reverse its mandate for public companies to disclose their pay ratios before 2018 (the first year of required disclosure), I suppose we should all start learning how to comply.  Leading practices for calculating the ratio and providing narrative disclosure will develop over the next couple of years, but I have summarized the important parts of the rules in this post:

What is the required disclosure?

Registrants must disclose:

  • The median of the annual total compensation of all employees of the registrant (excluding the CEO)
  • The annual total compensation of the CEO; and
  • The ratio of the median to the CEO’s compensation.

The ratio needs to be expressed as X:1 or X to 1 where “X” represents the CEO’s total compensation and “1” represents the median employee’s salary.  The ratio can also be expressed in narrative form such as: “The CEO’s annual total compensation is X times the median employee’s annual total compensation.”  You can’t Continue Reading Pay ratio (unfortunately) coming to public company filings soon

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.”

Really?

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.

Continue Reading CEO pay ratios: ineffective disclosure on steroids

Long Delay for JOBS Act Changes
Photo by Omar Parada

On January 14th, the House passed H.R. 37 “Promoting Job Creation and Reducing Small Business Burdens Act.”  Although passed with some support from the Democrats (29 votes, which in these days of hyper-partisanship is practically a bipartisan bill), the White House issued a veto threat on January 12th because the bill also delays part of the Volker Rule effectiveness until July 21, 2019.  Thus, in its current form, it looks dead on arrival, but there are some interesting ideas that I support and will hopefully make it in a revised bill later in the term:

  • Delays the requirement for savings and loan holding companies to register under the Securities Exchange Act of 1934 to the same extent as bank holding companies (assets of $10 million and class of equity securities held of record by 2,000 or more persons).  Also allows deregistration for savings and loan holding companies when they have fewer than 1200 shareholders of record.  This seems fair and was likely an unintended distinction made when the JOBS Act passed.  Unfortunately, this innocuous bill was grouped with the Volker delay. 
  • Provides for an exemption from the Securities Exchange Act of 1934 for certain business brokers.  The bill provides for some restrictions such as Continue Reading Update to the JOBS Act? Probably not…