Statement Summary
The press release discusses the complexities and inefficiencies of executive compensation disclosures mandated by the SEC. The speaker highlights that these disclosures, while intended to protect investors, have become cumbersome, costly, and less useful over time. Instead of providing meaningful insights, they often focus on trivial details that cater more to public curiosity than serve the actual needs of investors. Examples such as pay ratio and pay-versus-performance disclosures are criticized for offering little value, leading to wasted resources and skewed corporate behavior. The speaker calls for a reevaluation of these rules to ensure they provide genuine value to investors, questioning the necessity of mandates that do not enhance investors’ ability to assess companies reasonably.
Original Statement
Good afternoon. Thank you to Chairman Atkins for convening today’s roundtable and thank you to the moderators and panelists for joining us to discuss this important topic. On a recent trip to Alaska, one of the most striking sights was the rich forests of Sitka spruces clustering on steep mountainsides climbing up from the sea. I quickly stowed my binoculars in favor of taking in the whole scene. Absent a distinguishing feature—a different tree type, an intriguing root system, a bald eagle perched on its branches, or a bear lurking in its shade—the grandeur of the forest is lost when focusing on any one tree. Trying not to lose sight of the forest for the trees in beautiful Alaska brings me back to the ugly reality of executive compensation disclosure.
Over the years, executive compensation disclosure has become increasingly unwieldy and expensive and decreasingly useful. The SEC’s rules focus excessively on random trees rather than giving a realistic view of the forest. They direct readers’ attention to a set of executive compensation items that, largely, entertain the onlooker rather than educate the investor. Preparing the lengthy and complex disclosures eats up lots of resources—management time and attention, attorneys’ and accountants’ billable hours, and even trees as pages of disclosures pile up—and distort corporate decision-making.
Done right, disclosure rules are one form of investor protection. Material information provided to prospective investors arms them with “a rational basis to evaluate [a company and] its securities.”
My primary question for today’s panels is whether our current disclosure rules on executive compensation accomplish that goal.
Some executive compensation rules seem more responsive to the general public’s curiosity than a genuine investor need for material information. Painstakingly calculated tallies of perks, like rides on the corporate jet, housing allowances for overseas assignments, or car services give us a tiny window into executives’ lives, but do little to fill out an investor’s picture of the company. Lately, our rulemakings have taken a “more is better” approach to executive compensation disclosure. These tack-on rules to the growing alphabet of Item 402 of Reg S-K—we are almost all the way through the alphabet—do not provide new information. Instead, these rules re-package and re-present data that investors mostly already have. Or they add details that are immaterial. Do investors even look at this “new” information? And if they do, are we confident it gives them a rational basis to evaluate a security’s price?
Consider, for example, pay ratio disclosure and pay-versus-performance disclosure. In his statement of dissent on the pay ratio rule, then Commissioner Dan Gallagher noted that it could have been “marginally less useless” if it were limited to U.S. full-time employees. While not a ringing endorsement of the rule or any of its possible permutations, his comment highlights that even with respect to a rule mandated by Congress as this rule was, the Commission retains some latitude to implement it in the best way possible.
More recently, pursuant to another Dodd-Frank mandate, the Commission adopted the pay-versus-performance rule. The overarching feedback I hear on the rule is that it is a regulatory “tax” on public companies without a corresponding benefit for investors. Management, and the high-priced consultants and lawyers they hire, spend hours preparing the various narratives, tables, and graphs that produce nothing but yawns of disinterest from investors.
More concerning than the direct costs of producing executive compensation disclosures are the costs that arise from the distortion of corporate behavior in response to executive compensation disclosure mandates. Perhaps a company opts for a compensation scheme that is less effective at aligning incentives because of the way such a scheme will be reflected under SEC disclosure rules that do not necessarily represent economic reality. Or perhaps a company opts not to provide security for its executives because it appears in a laundry list of examples of perks in a 2006 Commission release that incidentally declines to define what a perk is. Now may be time for the Commission to return to a more nuanced approach to personal security disclosure that considers the context in which those measures are provided. Some companies have even gone so far as to eliminate perks altogether while offsetting such “cost-saving” measures with increases to base salaries. Executive compensation disclosure, along with other disclosures, should reflect rather than direct corporate actions.
The age-old philosophical question is whether a falling tree makes a sound when nobody is around to hear it. The more relevant and less philosophical question for today’s discussion is if the disclosures we are mandating do not provide investors a rational basis to assess a company, why mandate them at all? I look forward to hearing from today’s moderators and panelists about how we can improve our executive compensation mandates so that they serve investors.
References:
- Alan B. Levenson, The Role of the SEC as a Consumer Protection Agency, 27 Bus. Law. 61, 62 (1971) (“The economic justification for disclosure as the keystone of investor protection lies in the belief that material corporate and financial information disseminated to prospective investors provides a rational basis to evaluate securities and this is a necessary precondition to efficient markets.”).
- Executive compensation disclosure mandates run from Regulation S-K 402(a) to 402(x).
- Commissioner Daniel M. Gallagher, Dissenting Statement at an Open Meeting to Adopt the “Pay Ratio” Rule, U.S. Securities and Exchange Commission (Aug. 5, 2015), Executive Compensation and Related Person Disclosure, 71 Fed. Reg. 53,158, 53,177 (Sept. 8, 2006) (“[E]xamples of items requiring disclosure as perquisites or personal benefits under Item 402 include but are not limited to . . . security provided at a personal residence or during personal travel”), Disclosure of Management Remuneration, 43 Fed. Reg. 6,060, 6,063 (Feb. 13, 1978).
