House narrowly approved an historic financial reform package
(NYT, Dec. 12) that the SEC is meeting to approve new compensation disclosure rules?)
As part of his peer pressure campaign, the President met with 12 of the CEOs from the largest U.S. financial institutions Monday morning to drive home the message that after these banks received help from the taxpayers, it’s time for them to give back. (Thanks to the tip from Pete Davis
of Pete Davis Capital Investment Ideas)
“Now, I should note that around the table all the financial industry executives said they supported financial regulatory reform,” the President said in an official statement
following the meeting. “The problem is there's a big gap between what I'm hearing here in the White House and the activities of lobbyists on behalf of these institutions or associations of which they're a member up on Capitol Hill. I urged them to close that gap, and they assured me that they would make every effort to do so.”
Does Corporate Governance Matter?
That begs the question, “Should U.S. boards even care about corporate governance reform, especially any change to executive compensation policies, in the near future?” The short answer, as I see it, is a resounding YES! Based on discussion at The Conference Board Governance Center
Fall Investor Summit, which focused on The Conference Board Task Force on Executive Compensation report
, some of the issues investors are concerned about for 2010 are compensation committee composition, executive long term incentive plans and how executive bonuses will be paid.
“An activist labor fund is filing resolutions at several companies asking the company to bar CEOs from sitting on the compensation committee,” said Amy Borrus, deputy director of the Council of Institutional Investors. “In general, though, I do think compensation committee chairs/directors are in the hot seat at companies where CEOs have been rewarded lavishly while shareowners (and employees) have taken a hit.”
She also pointed out the dangers of a CEO using one metric, such as earnings per share, as the sole metric for compensation because it can be manipulated. “Multiple measures of success make it harder to ‘game’ the results to get the payoff,” she said.
If boards aren’t already considering changes to their corporate governance models, specifically to executive compensation policies, then they better get started because change is already in the air.
Unlike the post-Enron accounting scandal era where the Sarbanes-Oxley Act helped quell nervous investors and directors, the fix
for the post financial-crisis era is a multi-pronged attack. (In addition to an inevitable legislative plan from Congress, there is international pressure with the G-20 having written its own guidelines for executive compensation, the announcement that the United Kingdom and France are planning on taxing banker bonuses and the progressive Obama administration is using its agencies – the Federal Reserve, Treasury and SEC – to regulate executive pay.)
SEC to Vote on Compensation Disclosure
The full SEC is scheduled to meet Wednesday morning (See SEC meeting notice
) to vote on two items: amendments to enhance the disclosures issuers are required to make about compensation and other corporate governance matters (See SEC proposal
) and amendments to the investment advisor custody rule. If the SEC votes to approve both measures, it would most likely mean boards would have to tweak their Compensation Discussion & Analysis (CD&A) for the upcoming proxy seasons. Such additional disclosures would include information about how incentives are tied to risks, the fees paid to compensation consultants when they provide other services to a company, and whether or not the compensation committee or full board has approved the dual use of compensation consultants.
The SEC received about 160 comment letters on the compensation and other corporate governance matters proposals.
Goldman Sachs the First of Many?
An argument can be made that Obama’s “shame campaign” to get banks to control executive compensation got its first major convert. Last week Goldman Sachs Chair and CEO Lloyd C. Blankfein announced (See Dec. 10 press release
), among many things, that his bank is replacing cash bonuses for its 30-person management committee with company Shares at Risk. The rest of the plan calls for:
• Shares at Risk
cannot be sold for five years, in addition to other restrictions and the holding period on those shares includes an enhanced recapture provision that will permit the firm to recapture the shares in cases where the employee engaged in materially improper risk analysis or failed sufficiently to raise concerns about risks.
• The enhanced recapture rights
build off an existing clawback mechanism which goes well beyond employee acts of fraud or malfeasance and includes any conduct that is detrimental to the firm, including conduct resulting in a material restatement of the financial statements or material financial harm to the firm or one of its business units.
• Shareholders will have an advisory vote
on the firm’s compensation principles and the compensation of its named executive officers at the firm’s annual meeting in 2010.
Not surprisingly, some of the measures announced by Goldman Sachs are addressed by the G-20 Summit Financial Stability Board Principles for Sound Compensation Practices.
The Obama Administration is using good old-fashioned peer pressure and more targeted disclosure to change the way executive compensation policies are carried out by public companies in the U.S. (How else can you explain that only days after the