A variety of sources are now proposing new rules for financial markets and corporate governance. Just recently President Obama released a “white paper” for financial regulatory reform. Before that, Congressman Gary Peters introduced the Shareholder Empowerment Act of 2009, and before him, Senator Charles Schumer touted a “Shareholder Bill of Rights.”
Tangentially related to all such proposals (and an easy way to resonate with constituents), is the idea that executive compensation needs to be revamped as well. The SEC has not ignored this issue. Most recently, On June 10, 2009, Chairman Mary Schapiro issued a statement considering several proposals requiring greater proxy disclosure of the following:
- How a company and its board manages risk
- What is the company’s overall compensation approach? (the goal of this question being to discourage incentive structures that reward short-term risk taking without accounting for long-term effects)
- Potential conflicts with compensation consultants; and
- Board of director leadership structure
Such proposals are likely to have the same effect as the rules of the past few years requiring a Compensation Discussion & Analysis. The rules are instituted under a mantle of protecting investors by ensuring they have information needed to make investment decisions, but they are also passed with an eye toward influencing issuer behavior and pushing it in a particular direction. For example, a requirement that a board disclose its overall compensation approach has the same effect as a requirement that a board actually have an overall compensation approach (which it may in fact have but not discuss in those terms). Such proposals may encourage desirable behavior, but the SEC risks entrenching flawed compensation systems as opposed to simply requiring accurate disclosure about a compensation system that is fully within the purview of each individual company.