SEC Comments on Executive Compensation

Securities and Exchange Commission Mary Schapiro yesterday spoke out on executive compensation. She stated that while the role of the SEC is not to set or cap compensation, but to ensure that investors are able to make the best possible decision based on accurate and pertinent information about a company’s stock.

Because the methods and types of executive compensation have become diverse and complex, the SEC frequently revises disclosure requirements to reflect that compensation in the company’s financial statements. The SEC is currently new set of proxy disclosure rules to provide further insight into the effects of 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.

The new package includes disclosures about:

• how a company — and its board — manages risks
• 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.)
• potential conflicts of interest by compensation consultants, including disclosure of relationships between the consultants and the company and their affiliates
• director nominees, including their experience and qualifications to serve on the board or on particular board committees

According to Shapiro this kind of information benefits investors, but only goes so far. Investors who don’t like what they learn can either sell their shares or use the proxy process to vote for change. However, shareholders who currently wish to nominate their own board candidates typically face an expensive 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.”

Image Credit: artem finland, Flickr