22 May. 2017 | Comments (0)
Nearly four months into President Trump’s first term, the perception is that a full rollback of the Dodd-Frank Act rules related to corporate governance and executive compensation is not in the cards. (See our related blog post from February 13.) Instead, management and directors of public companies can expect some tinkering when it comes to enforcing existing rules and finalizing others. In speaking to two former SEC commissioners and a fellow at the Millstein Center for Global Markets and Corporate Ownership at Columbia Law School, I can say that public companies aren’t going to wait around to see how it plays out. The gist of what they told me is that while the federal government can roll back regulations, it can’t always change a company’s behavior and routine that the regulations helped institute. The House Financial Services Committee earlier this month voted along party lines to send the Financial CHOICE Act to the House floor. Among many things, the bill would limit the use of Say on Pay, eliminate the CEO pay ratio, conflict minerals, and hedging policy disclosure rules, and limit clawbacks to those executives responsible for company financials when there is a restatement.
No matter what Congress and the Trump Administration do to modify the Dodd-Frank Act, boards and management actions will be dictated by their shareholders. And judging by a recent letter from the Council of Institutional Investors, they aren’t going to sit idly by if Dodd-Frank is gutted. The letter to House Speaker Paul Ryan that was signed by nearly 60 institutional investors expressed concern with five areas. They believe it would:
- Set prohibitively costly hurdles on shareholder proposals
- Roll back curbs on abusive pay practices
- Restrict the right of shareholders to vote for directors in contested elections for board seats
- Create an intrusive new regulatory scheme for proxy advisors, who provide shareholders with independent research
- Shackle the SEC with excessive cost-benefit analysis requirements, unwise limits on enforcement and Congressional review requirements
And then there is another factor to consider. Since companies have spent the better part of the past seven years adopting processes and procedures for their governance disclosures mandated by Dodd-Frank, it may be difficult to roll those back. “Things that are mandated tend to settle in,” Elisse Walter, former SEC chair and corporate board director, told an audience at The Conference Board Governance Center spring conference last month. “I think if the [Sarbanes-Oxley Act] internal control rules were scaled back, you wouldn’t see them disappear at companies. Another example is the proxy access rule. Despite the fact that it didn’t survive, you see that proxy access by private ordering similar to what the SEC originally called for becoming the law of the land.” Walter appeared on a panel about governance in the Trump Administration with former SEC Commissioner Annette Nazareth during The Conference Board conference. Nazareth compared the legacy of the Sarbanes-Oxley Act to Dodd-Frank. “I believe much of the Sarbanes-Oxley Act has worked well,” Nazareth said. “The oversight of internal controls of financial reporting is part of the DNA of companies now. I don’t foresee much change in that area in the new Administration. As for executive compensation [rules under Dodd-Frank], that’s been more controversial. It’s possible we’ll see some pull back on the executive compensation rules (i.e. CEO pay ratio). There have been concerns about the costs of the rule far outweighing the benefits. It will be interesting to see what happens. That said, I don’t think we will see a lot of deregulation in this area.” For the most part, that is what Jonathan Kim, a practicing fellow at The Millstein Center and a former general counsel and corporate secretary, has heard from in-house practitioners. “Seven years after Dodd-Frank was implemented, we still don’t have [final] rules for public companies in a number of areas, especially executive compensation,” Kim said. “And for other areas, where rules have been in place for a number of reporting cycles, such as Say on Pay, it may make it difficult for outright repeal or significant rollback of the rules, as companies have since adjusted to the Dodd-Frank landscape.” One unsettled area is clawback policies for executives when there is a financial restatement, which Dodd-Frank called for. It would expand the provision in Sarbanes-Oxley, which only required compensation clawback when there is a restatement due to misconduct. “When Dodd-Frank first came out and many of us involved with corporate governance issues focused on implementing and maintaining a clawback policy even though we didn’t know what the final rules would be,” Kim said. “You may see many best practices in this area instead of it being codified in rules.” According to a recent webcast by the Association of Corporate Counsel , if the Republicans do get their way it would seem the following rules would either be repealed or just not implemented due to the lack of a final rule:
- CEO pay ratio
- Hedging policy disclosure
- Conflict minerals disclosure
It should be noted that with the SEC now having a quorum of at least three members, including new Chair Jay Clayton, the agency can start to slow down any existing Dodd-Frank rulemaking and enforcement. And, in some cases, that’s as good as repealing rules. The views presented on the Governance Center Blog are not the official views of The Conference Board or the Governance Center and are not necessarily endorsed by all members, sponsors, advisors, contributors, staff members, or others associated with The Conference Board or the Governance Center.