Merritt Cole, partner in the business department of White and Williams LLP in Philadelphia, says that the SEC is focusing on three main areas of disclosure: compensation and perks paid within the last three years; holdings of stock options and other kinds of equity incentives that can provide a gain in the future; and retirement, change-in-control and other post-employment payments. The bottom line? Expect to see more detailed disclosure in the future.
Smart Business spoke with Cole about the proposed expanded disclosure laws and what they mean to corporations and their shareholders.
What in your opinion prompted the SEC to expand executive compensation laws?
The SEC felt that shareholders were not getting adequate information regarding executive compensation, including perks, retirement and post-termination benefits. Plus, a number of high-profile individuals had made splashes in the news, such as when Jack Welch retired from GE and information came out about what many perceived to be extraordinary retirement benefits.
In the instances of executives at Tyco International and Enron, there was significant public and regulatory concern about what was being paid, who knew about it and how compensation decisions were made.
There has been concern that the compensation committees of some companies have not been given full information concerning executive compensation and benefits, including forgiveness of loans, in understandable form and that the methods by which some of the committees determined executive compensation and benefits were not always adequate.
What do you think is the SEC’s ultimate goal of expanding these laws?
As SEC chairman Chris Cox has said, the SEC’s goal is ‘wage clarity, not wage controls.’ The new rules are intended to provide investors with a more complete picture of the compensation and benefits earned by a public company’s highest-paid executive officers, including the CEO and CFO. The new disclosures include new total compensation tabular information, a new retirement plan payments-and-benefits table and a new director compensation table. The SEC wants not only to improve the compensation information available to shareholders, but to require that public companies disclose in greater detail how their compensation committees actually make decisions. In short, the SEC wants more transparency. By means of these disclosures, the SEC hopes to improve the performance of compensation committees.
At what point does such disclosure become too personal?
One of the new rules would require a change in the reporting of stock ownership by executive officers. The SEC proposes to require disclosure of the pledge of stock as collateral for loans or other obligations. I don’t know if there is a benefit to disclosing pledges of stock where, for example, the amount of stock pledged is only a small part of the executive’s holdings.
Are these new laws going to be good or bad for business?
On one hand, the new disclosure requirements will increase the amount of work management, compensation committees and their professional advisers will have to do to prepare this expanded disclosure. The resources and budgets of smaller companies are already stretched thin as a result of the compliance efforts necessitated by Sarbanes-Oxley, and I am concerned that the new rules some of which are very technical will add to their burdens.
In addition, I am troubled by one of the new disclosure requirements in particular. The SEC has proposed to expand the disclosure to include the compensation of certain highly compensated individuals who are not executive officers (without naming them). These might include insurance or software salesmen and others whose compensation is primarily commission-based. This type of disclosure could harm companies competitively and cause problems among employees. Companies in the entertainment industries, where nonexecutives often have very complicated compensation packages, might find it difficult to determine how to comply with this requirement.
On the other hand, expanded disclosure should increase investor confidence. Right now, many shareholders are unhappy because of the perceived abuses of a relatively few bad apples. Increased disclosure will encourage compensation committees to be more thoughtful and more thorough. Increased investor confidence strengthens our capital markets, and that’s what disclosure rules are intended to accomplish. But the devil is in the details. We’ll have to see exactly what the new rules ultimately require when they are in final form.
MERRITT COLE is a partner in the business department of White and Williams LLP in Philadelphia. Reach him at (215) 864-7018.