Panel on Financial Reform at Zicklin Center for Corporate Integrity
By Jeremy Sykes
Four powerhouses of the financial services industry met at Baruch College, August 11th to discuss the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act on executive compensation and investor relations. The forum, put on by a collaboration of NIRI (National Investor Relations Instutute) and the Zicklin Center for Corporate Integrity, was composed of individuals from NASDAQ, NYSE, Baker & Mackenzie, and NIRI itself. The four panelists were Clarke D. Camper, senior vice president and Head of Government Affairs at NYSE Euronext, Carol Stubblefield, partner, Baker & McKenzie, John Yetter, vice president of NASDAQ’s General Counsel’s Office, and was moderated by Jeff Morgan, NIRI President and CEO.
The purpose of the panel was to discuss how the financial reform bill would impact investor relations of public companies, as well as to discuss in detail how forty pages in the bill detailing new restrictions on executive compensation could change the financial world.
The consensus was as confused and vague as the legislation itself. The bill, which assigns broad new powers to a variety of rule-making bodies, does not give many specifics on how the broad strokes of well meaning politicians would become rules or how they would be enforced. The earliest bit of rule making based on these new powers could occur as early as August when the SEC rules on expanded proxy rights for investors.
Mr. Yetter, discussing corporate disclosure and governance asserted that the Financial Reform Bill could actually reduce compliance costs for some firms based on a number of new exemptions to current rules that were passed along with the reform act. One such exemption, remarked upon by Mr. Camper was a SOX exemption for companies with a market cap under $75 million. However, Ms. Stubblefield cautioned that there were a few “sleeper” regulations that could add new complexity to an already complex regulatory environment.
Most panelists seemed to think that overall the bill was “good” and anxieties were fairly low-key. One major change expected would be to how executive compensation is disclosed to investors. Currently the SEC’s rules favor naming director and executive compensation in the yearly proxy statements when investors vote to accept the compensation committee’s recommendation. Take for example, Broadcom’s Non-Employee Director Compensation from 2006:
The panelists did not discuss possible changes to this type of data, only that large changes to the overall disclosure requirement are expected to occur. Specifically, Yetter commented on the new proxy voting procedures, including regulations on so-called “golden parachutes” and “say on pay” provisions. The former relates to outgoing executives compensation packages, and the latter to proxy votes on current executives pay. The new law requires all golden parachute provisions to be voted on in the merger proxy, along with the ratification of new board members, and the up or down vote on the merger itself.
Ms. Stubblefield voiced the concerns of several of her clients, fears that the executive compensation, “say on pay” provisions might negatively effect executive performance. However, Mr. Yetter confirmed that many companies already have “say on pay” rules of their own creation, and that there have not been any negative effects demonstrated from such a policy as yet.
A further rule of the Dodd-Frank bill confirms the practice instituted in the bailout packages of an executive pay clawback, whereby the investor can withdraw compensation from executives under certain conditions. This would certainly apply in cases of unjust enrichment. However, all panelists admitted that the bill was noticeably vague on how these clawbacks will be achieved. A general consensus of the discussion is that the SEC has it’s work cut out for it over the next few years, as it will have to formulate actual policy based on the act’s directives.
Another concern for Stubblefield and Mr. Morgan is the new executive pay to common employee ratio that companies will have to start disclosing. This refers to page 1436-7 of the bill, where:
(A) the median of the annual total compensation of all employees of the issuer, except the chief executive officer (or any equivalent position) of the issuer;
(B) the annual total compensation of the chief executive officer (or any equivalent position) of the issuer; and
(C) the ratio of the amount described in
5 subparagraph (A) to the amount described in
6 subparagraph (B).
The purpose of this section, amid growing concerns about executive pay, was to draw an illustration for the investor about pay scale equality. Both executives expressed concerns about the expense that these calculations would incur, in terms of time, cash and the convoluted calculations that would have to be drawn up. Mr. Morgan was particularly concerned that any restrictions on executive pay, or the disclosure challenges presented by these new regs would discourage top executives from accepting “turn-around jobs” where there is significant risk to the accepting officer if the turn-around fails to occur.
During the question and answer session, it was asked if any imminent changes in political power this November would effect the bill. Mr. Camper indicated that he thought it was unlikely that a change in House or Senate leadership would have vast changes in the bill.
Another facet of the bill that came up during the panel discussion was a recurring issue in investor proxy relations, involving whether or not to let investors nominate board members. Currently, the executive and directorship, as well as perhaps the largest corporate owners can make board nominations. New regulation could expand voter rights to even those whose shares number in the hundreds or less. Stubblefield’s clients are perturbed by this possible development as it could cause considerable added expense in voting procedures, as well as an overall loss of control. However, Yetter indicated that the bill only affirmed the SEC’s right to make rules on this subject, and did not make any formal recommendations on voter rights.