Court ruling delays SEC financial reforms

Published: September 13, 2011 6:00 am ET

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Topics Public Policy

WASHINGTON (Sept. 13, 11:25 a.m. ET) — Six key looming federal regulations that will impact executive compensation — including proxy access and mandatory disclosure of the ratio between CEO pay and the median pay of a company’s workforce — have been effectively postponed at least until 2013. All were originally scheduled to go into effect before next year’s proxy voting season.

The Securities and Exchange Commission delayed those rulemakings required by the Dodd-Frank financial reform bill after a three-judge panel of the U.S. Court of Appeals for the District of Columbia struck down the proposed marketwide proxy access rule in late July. The panel said the SEC had acted “arbitrarily and capriciously” and failed to properly consider the costs and benefits of the rule.

Postponement of the pending rulemakings will provide temporary relief to companies that are particular squeamish about two of the pending rules:

* Marketwide proxy access, which is designed to make it easier for shareholders to nominate independent directors or a slate of candidates for the board.

* The disclosure and publication of the CEO-to-worker pay ratio in proxy statements.

The SEC has also pushed back, most likely until at least the 2013 proxy season, regulations governing the disclosure of hedging policies, rules for the disclosure of pay vs. performance data, regulation of incentive pay at financial institutions, and mandatory implementation of clawback policies. Clawbacks let companies take back performance awards from executives when financial statements are restated.

“The CEO-to-worker pay ratio is going to be a big issue because companies will have to put that number into their proxy,” said James Reda, founder and managing director of James F. Reda & Associates LLC in New York.

“It is going to be a big issue and a big fight in Congress because businesses, particularly big, multinational corporations, are dead set against it because it highlights the issue of executive pay going up and worker pay being stagnant,” Reda said.

“I’m not surprised they pushed it down the road, because the CEO pay disclosure ratio is one of the most controversial issues of the Dodd-Frank reform bill,” added Aaron Boyd, research director at executive compensation research firm Equilar Inc. in Redwood Shores, Calif.

“Not only is there a lot of confusion around the rule,” said Boyd, “but the political environment changed shortly after Dodd-Frank was passed” when, four months later, the Republican party regained control of the House, narrowing the Democratic majority in the Senate to 51-47. (There are two independents in the Senate.)

“The ratio is going to take an extraordinary effort to do, and companies are not going to do it until they have to do it,” said Joe Mallin, a managing director and head of the Atlanta office of New York-based compensation consulting firm Pearl Meyer & Partners LLC.

“It is going to be an operational nightmare just to figure out how to do it, and it is also going to be a public relations/shareholder nightmare as the number will be out there in a vacuum.”

But Andrew Goldstein, the Chicago-based central division practice leader for executive compensation with Towers Watson, of New York, disagrees.

A case in point: can that number be relevant and fairly compare two similar companies when one of them has outsourced part of its workforce, and the other employs workers performing that same function in-house?

Deb Nielsen, the Boston-based director of data operations and executive compensation at Kenexa Corp. of Wayne, Pa., agreed.

“Unfortunately, it is a problematic number to come up with and it will be a nightmare to create something that makes sense for it,” she said.

Gaining proxy access has been a tool investors have sought for years in order to nominate their own candidates to replace existing directors whom they feel haven’t done a proper job of managing executive compensation or providing proper oversight of management.

Currently, shareholders can nominate different candidates, but only by launching a costly proxy fight and mailing out their own ballots — a system that shareholders argue serves to entrench existing directors on the board, including management.

What will happen next with the marketwide proxy access rule is unclear. But the consensus is that SEC won’t appeal the ruling.

“The SEC will likely propose a revised and presumably narrower rule” because the court’s ruling “contained unequivocal criticism of the rule,” Pearl Meyer said in a client alert the consulting firm issued after the court ruling July 22.


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Court ruling delays SEC financial reforms

Published: September 13, 2011 6:00 am ET

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