Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, June 10, 2009

SEC Will Review Compensation Disclosure Again

SEC Chairman Schapiro announced that the agency is considering proposals for additional disclosure regarding executive compensation:

[T]he SEC is actively considering a package of new proxy disclosure rules that will provide further sunshine on compensation decisions. While these proposals would not dictate particular compensation decisions, they would lead companies to analyze how compensation impacts risk taking and the implications for long term corporate health of the behavior they are incenting.

“To achieve this, we will be considering several proposals requiring greater disclosure:

• About how a company — and its board — manages risks.

About a company’s overall compensation approach. Incentive structures that rewarded short term risk taking without taking into account the potential long term effects on the company are widely believed to have contributed to the economic crisis.
About potential conflicts of interest by compensation consultants, including disclosure of relationships between the consultants and the company and their affiliates, so both compensation committees and investors will be better able to assess the advice the consultants provide.
And, about director nominees, including their experience and qualifications to serve on the board or on particular board committees — and about why a board has chosen its particular leadership structure.
“Knowing this kind of information can be of great benefit to investors, but even disclosure only takes us so far. If investors don’t like what they learn, they have two choices: sell their shares or use the proxy process to vote for change. Unfortunately, neither of these options is easy. Selling their stock deprives the investor of the upside value that change can bring. And, under current rules, shareholders who wish to nominate their own candidates must typically launch a costly proxy fight.

“It is for this reason that last month the SEC proposed rules that would enhance the ability of shareholders to exercise their legal rights to nominate directors on corporate boards. Of course, these proposals are just that — “proposals” — and we fully expect to receive many comments about them. I believe the meaningful ability of shareholders to nominate directors is intricately linked to the ability of shareholders to hold directors accountable for their compensation decisions.

“I firmly believe that better disclosure of compensation leads to more informed shareholders and in turn to more accountable corporate directors. This is the foundation of our capital markets.”

Meanwhile, Kenneth Feinberg has been appointed compensation czar to set executive compensation at seven of the largest corporations that have received federal rescue funds.  NYTimes, Obama Names Overseer to Set Pay at Rescued Companies.

Finally, Treasury Secretary Geithner released a statement on Compensation today, in which he stated that he met with Schapiro, Federal Reserve Governor Dan Tarullo, and top experts to examine how to better align compensation practices – particularly in the financial sector – with sound risk management and long-term growth:

In considering these reforms, we start with a set of broad-based principles that – with the help of experts like those we assembled today – we expect to evolve over time. By outlining these principles now, we begin the process of bringing compensation practices more tightly in line with the interests of shareholders and reinforcing the stability of firms and the financial system.

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