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If Dodd-Frank is repealed, will shareholders use 14a-8 proposal rule to replace key parts?

Bloomberg BNA Corporate Counsel Weekly reports that:

Shareholders might also put pressure on companies to keep the votes even if Dodd-Frank is repealed. Proxy advisory firms could propose that clients vote against directors at companies without say-on-pay, according to Jon Lukomnik, executive director of the Investor Responsibility Research Center Institute in New York.

“A company that withdraws it is going to make itself a target,” Lukomnik said. “That doesn't mean some won't withdraw it.” He said he expects many companies would keep an annual say-on-pay vote.

I suspect there may be an effort by institutional investors to keep governance provisions like say on pay via the proposal process, just as they used the proposal process to put through shareholder nomination powers via bylaw amendments. 

The Economist gets letters on executive compensation, which I answer for them

Last week's issue of The Economist had three letters to the editor on executive compensation that seemed noteworthy:

Regarding executive pay (“Neither rigged nor fair”, June 25th) what harm would come from limiting the pay of chief executives to, say, 40 times that of the average worker? Do we honestly think there would be a tragic exodus of managerial talent? Such limits would help restore workers’ faith in the economic system, which, as Joseph Stiglitz argued in “The Price of Inequality”, would increase productivity. A ratio linked to workers’ pay would also help bosses understand, and even increase, the pay of the rank and file.

PETER COLBY
San Francisco

Do I think there would be an exodus of managerial talent under such a rule? Yes. If all you do is limit CEO pay, there will be plenty of jobs that pay much higher salaries to which CEO-types could migrate. Your average CEO, after all, would probably do quite well as an investment banker, hedge fund manager, private equity fund manager, etc.... Would such an exodus be tragic? If it resulted in a brain drain out of corporate C-suites, that would certainly not be good for productivity.

Executive salary is a classic agency problem for which there is a simple regulatory fix. Mandatory shareholding for chief executives would force their personal interests to align with the companies they head. Require them to buy shares amounting to several times their total remuneration for the year and hold them for ten years. Those CEOs who really add value will have nothing to worry about. The others will lose their shirts.

SABESH SHIVASABESAN
Pretoria, South Africa

Taken with the prior letter, this one raises the question of why we care about executive compensation. If all we care about is the interests of shareholders, the latter writer's idea has some merit. It resembles Charles Elson's proposal that corporate directors be required to hold significant amounts of the stock of the company on whose board they serve. But there are some concerns: Could the CEO afford to buy so much stock, especially since the Sarbanes-Oxley Act prohibits companies from loaning money to their officers? There is a tax disadvantage for the company: The company cannot take a tax deduction for the value of the gain the CEO eventually realizes if s/he  made a Section 83(b) election to have the gain taxed as a capital gain. Conversely, the CEO may be subject to an unnecessary tax liability if s/he made Section 83(b) election and the stock price declines. In addition, the CEO must pay withholding tax at time of of the grant regardless of when shares are sold. The company experiences an immediate dilution of EPS for total shares granted.

But suppose we also care about the social consequences of CEO pay. In that case, aligning executive and managerial interests may not be a great idea. As I explained in my book, Corporate Governance After the Financial Crisis:

As we have seen, regulators and some commentators identified executive compensation schemes that focused bank managers on short-term returns to shareholders as a causal factor in the financial crisis of 2007-2008. As we have also seen, shareholder activists long have complained that these schemes provide pay without performance. This was one of the corporate governance flaws Dodd-Frank was intended to address, most notably via say on pay.

The trouble, of course, is that shareholders and society do not have the same goals when it comes to executive pay. Society wants managers to be more risk averse. Shareholders want them to be less risk averse. If say on pay and other shareholder empowerment provisions of Dodd-Frank succeed, manager and shareholder interests will be further aligned, which will encourage the former to undertake higher risks in the search for higher returns to shareholders. Accordingly, as Christopher Bruner aptly observed, “the shareholder-empowerment position appears self-contradictory, essentially amounting to the claim that we must give shareholders more power because managers left to the themselves have excessively focused on the shareholders’ interests.”

Finally: 

We are barraged by the left about the unconscionable salaries of chief executives. The average pay of top athletes, pop stars and actors is higher, yet none of them contributes to the jobs, salaries, investment and returns to average investors the same way that a CEO does.

SCOTT PROCTOR
Livonia, New York

Again, it depends on why we care. If what we care about is income inequality, the writer has a good point. On the other hand, athletes, pop stars, and actors bargain at arms'-length with their employers. In contrast, CEO pay arguably is not negotiated at arms'-length. I don't give that argument as much credit as, say, Lucian Bebchuk but it's not completely wrong either. I discuss this issue at some length in my book Corporate Governance After the Financial Crisis. I conclude that the so-called managerial power thesis is mostly wrong, but only mostly.

When CEO pay was modest: It was a different time and that matters

Fascinating new paper by my colleague Steve Bank, along with Brian Cheffins and Harwell Wells:

CEO pay is a controversial issue in America but there was a time, often overlooked today, when chief executives were not paid nearly as much as they are now. From 1940 to the mid-1970s executive pay was modest by today’s standards even though U.S. business was generally thriving. What worked to keep executive pay in check? Economist Thomas Piketty and others credit high marginal income tax rates, leading to calls for a return to a similar tax regime. This paper casts doubt on the impact tax had and also shows that neither the configuration of boards nor shareholder activism played a significant role in constraining executive pay. It emphasizes instead the roles played by strong unions, a different and more circumscribed market for managerial talent, and social norms, explanations that do not easily lend themselves to generating modern policy prescriptions.

Executive Pay: What Worked? (July 20, 2016). Journal of Corporation Law, Forthcoming; UCLA School of Law, Law-Econ Research Paper No. 16-11. Available at SSRN: http://ssrn.com/abstract=2812349

Highly recommended despite the glaring omission of citations to yours truly.

A short critique of British PM Theresa May's proposal for pay ratio disclosure

In her principal speech during her recent successful campaign to become the United Kingdom's new Prime Minister, Theresa May said a lot of things that as a corporate governance thinker I have very serious doubts about. In this post, I look at her proposal for greater CEO pay disclosure:

I want to see more transparency, including the full disclosure of bonus targets and the publication of “pay multiple” data: that is, the ratio between the CEO’s pay and the average company worker’s pay. 

The US adopted such a requirement in the 2010 Dodd-Frank legislation, of course. It was a dumb idea back then and it's still a dumb idea.

I discussed this Dodd-Frank requirement in my my book Corporate Governance after the Financial Crisis, where I argued that:

The rules are unlikely to provide investors with meaningful information. Instead, they are intended to shame corporations by highlighting the disparity between CEO and shop floor employee pay.

I further explained that:

This requirement is going to be hugely burdensome:

[It] means that for every employee, the company would have to calculate his or her salary, bonus, stock awards, option awards, nonequity incentive plan compensation, change in pension value and nonqualified deferred compensation earnings, and all other compensation (e.g., perquisites). This information would undoubtedly be extremely time-consuming to collect and analyze, making it virtually impossible for a company with thousands of employees to comply with this section of the Act.[1]

In sum, this was another pointless and useless but incredibly costly regulation of the sort that Washington has been loading on business on a bipartisan basis ever since George Bush decided to cave and sign Sarbanes-Oxley into law. Why the UK would want to go down that road is simply beyond me.

A short critique of British PM Theresa May's proposal for mandatory say on pay

In her principal speech during her recent successful campaign to become the United Kingdom's new Prime Minister, Theresa May said a lot of things that as a corporate governance thinker I have very serious doubts about. Ion this post, I look at her views on say on pay:

So as part of the changes I want to make to corporate governance, I want to make shareholder votes on corporate pay not just advisory but binding. 

<SARCASM>What a good idea. After all, the nonbinding say on pay rules have worked so well.</SARCASM>

From my book Corporate Governance after the Financial Crisis:

Professor Jeffrey Gordon argues that the U.K. experience with say on pay makes a mandatory vote a “dubious choice.”[1] First, because individualized review of compensation schemes at the 10,000-odd U.S. reporting companies will be prohibitively expensive, activist institutional investors will probably insist on a narrow range of compensation programs that will force companies into something close to a one size fits all model. Second, because many institutional investors rely on proxy advisory firms, a very small number of gatekeepers will wield undue influence over compensation. This likely outcome seriously undercuts the case for say on pay. Proponents of say on pay claim it will help make management more accountable, but they ignore the probability that say on pay really will shift power from boards of directors not to shareholders but to advisory firms like RiskMetrics. There is good reason to think that boards are more accountable than those firms. “The most important proxy advisor, RiskMetrics, already faces conflict issues in its dual role of both advising and rating firms on corporate governance that will be greatly magnified when it begins to rate firms on their compensation plans.”[2] Ironically, the only constraint on RiskMetrics’ conflict is the market—i.e., the possibility that they will lose credibility and therefore customers—the very force most shareholder power proponents claim does not work when it comes to holding management accountable.

[1] Jeffrey N. Gordon, “Say on Pay”: Cautionary Notes on the U.K. Experience and the Case for Shareholder Opt-in, 46 Harv. J. Legis. 323, 325 (2009).

[2] Id. at 326.

<SARCASM>What a good idea. After all, the nonbinding say on pay rules have worked so well.</SARCASM>

From my book Corporate Governance after the Financial Crisis:

Professor Jeffrey Gordon argues that the U.K. experience with say on pay makes a mandatory vote a “dubious choice.”[1] First, because individualized review of compensation schemes at the 10,000-odd U.S. reporting companies will be prohibitively expensive, activist institutional investors will probably insist on a narrow range of compensation programs that will force companies into something close to a one size fits all model. Second, because many institutional investors rely on proxy advisory firms, a very small number of gatekeepers will wield undue influence over compensation. This likely outcome seriously undercuts the case for say on pay. Proponents of say on pay claim it will help make management more accountable, but they ignore the probability that say on pay really will shift power from boards of directors not to shareholders but to advisory firms like RiskMetrics. There is good reason to think that boards are more accountable than those firms. “The most important proxy advisor, RiskMetrics, already faces conflict issues in its dual role of both advising and rating firms on corporate governance that will be greatly magnified when it begins to rate firms on their compensation plans.”[2] Ironically, the only constraint on RiskMetrics’ conflict is the market—i.e., the possibility that they will lose credibility and therefore customers—the very force most shareholder power proponents claim does not work when it comes to holding management accountable.

[1] Jeffrey N. Gordon, “Say on Pay”: Cautionary Notes on the U.K. Experience and the Case for Shareholder Opt-in, 46 Harv. J. Legis. 323, 325 (2009).

[2] Id. at 326.

Binding say on pay coming (probably) to France: What a terrible idea

The Daily Mail is reporting that:

Shareholders must set French chief executives' pay in a binding vote that corporate boards cannot ignore, the French parliament decided early on Friday in reaction to a public outcry over Renault chief Carlos Ghosn's giant package. ...

President Francois Hollande pledged to give legal clout to shareholder votes on pay if boards ignored them, which would bring French law on "say-on-pay" into line with other big European countries such as Britain and Germany. ...

The bill is due to go to the Senate in early July.

From my book Corporate Governance after the Financial Crisis:

Professor Jeffrey Gordon argues that the U.K. experience with say on pay makes a mandatory vote a “dubious choice.”[1] First, because individualized review of compensation schemes at the 10,000-odd U.S. reporting companies will be prohibitively expensive, activist institutional investors will probably insist on a narrow range of compensation programs that will force companies into something close to a one size fits all model. Second, because many institutional investors rely on proxy advisory firms, a very small number of gatekeepers will wield undue influence over compensation. This likely outcome seriously undercuts the case for say on pay. Proponents of say on pay claim it will help make management more accountable, but they ignore the probability that say on pay really will shift power from boards of directors not to shareholders but to advisory firms like RiskMetrics. There is good reason to think that boards are more accountable than those firms. “The most important proxy advisor, RiskMetrics, already faces conflict issues in its dual role of both advising and rating firms on corporate governance that will be greatly magnified when it begins to rate firms on their compensation plans.”[2] Ironically, the only constraint on RiskMetrics’ conflict is the market—i.e., the possibility that they will lose credibility and therefore customers—the very force most shareholder power proponents claim does not work when it comes to holding management accountable.

[1] Jeffrey N. Gordon, “Say on Pay”: Cautionary Notes on the U.K. Experience and the Case for Shareholder Opt-in, 46 Harv. J. Legis. 323, 325 (2009).

[2] Id. at 326.

From my book Corporate Governance after the Financial Crisis:

Professor Jeffrey Gordon argues that the U.K. experience with say on pay makes a mandatory vote a “dubious choice.”[1] First, because individualized review of compensation schemes at the 10,000-odd U.S. reporting companies will be prohibitively expensive, activist institutional investors will probably insist on a narrow range of compensation programs that will force companies into something close to a one size fits all model. Second, because many institutional investors rely on proxy advisory firms, a very small number of gatekeepers will wield undue influence over compensation. This likely outcome seriously undercuts the case for say on pay. Proponents of say on pay claim it will help make management more accountable, but they ignore the probability that say on pay really will shift power from boards of directors not to shareholders but to advisory firms like RiskMetrics. There is good reason to think that boards are more accountable than those firms. “The most important proxy advisor, RiskMetrics, already faces conflict issues in its dual role of both advising and rating firms on corporate governance that will be greatly magnified when it begins to rate firms on their compensation plans.”[2] Ironically, the only constraint on RiskMetrics’ conflict is the market—i.e., the possibility that they will lose credibility and therefore customers—the very force most shareholder power proponents claim does not work when it comes to holding management accountable.

[1] Jeffrey N. Gordon, “Say on Pay”: Cautionary Notes on the U.K. Experience and the Case for Shareholder Opt-in, 46 Harv. J. Legis. 323, 325 (2009).

[2] Id. at 326.

Fried on "Rationalizing the Dodd-Frank Clawback"

Jesse Fried has posted a very interesting and persuasive article on executive compensation clawbacks:

On July 1, 2015, the Securities and Exchange Commission (SEC) proposed an excess-pay clawback rule to implement the provisions of Section 954 of the Dodd-Frank Act. I explain why the SEC’s proposed Dodd-Frank clawback, while reducing executives’ incentives to misreport, is overbroad. The economy and investors would be better served by a more narrowly targeted “smart” excess-pay clawback that focuses on fewer issuers, executives, and compensation arrangements.

Fried, Jesse M., Rationalizing the Dodd-Frank Clawback (April 12, 2016). Available at SSRN: http://ssrn.com/abstract=2764409

It'd be interesting to see his analysis frame applied to the new compensation clawback rule for banks.

Americans really are in a populist mood, if their attitude towards executive compensation is any evidence

Broc Romanek:

Here’s the teaser for this new set of survey results from Stanford:

Recently, the Rock Center for Corporate Governance at Stanford University conducted a nationwide survey of 1,202 individuals — representative by gender, race, age, political affiliation, household income, and state residence — to understand public perception of CEO pay levels among the 500 largest publicly traded corporations. Key takeaways are:

– CEOs are vastly overpaid, according to most Americans
– Most support drastic reductions
– The public is divided on government intervention

74 percent of Americans believe that CEOs are not paid the correct amount relative to the average worker. Only 16 percent believe that they are. While responses vary across demographic groups (e.g., political affiliation and household income), overall sentiment regarding CEO pay remains highly negative.

This part doesn’t surprise me – but it’s still pretty amazing:

Public frustration with CEO pay exists despite a public perception that CEOs earn only a fraction of their published compensation amounts. Disclosed CEO pay at Fortune 500 companies is ten times what the average American believes those CEOs earn. The typical American believes a CEO earns $1.0 million in pay (average of $9.3 million), whereas median reported compensation for the CEOs of these companies is approximately $10.3 million (average of $12.2 million).2

Responses vary based on the household income of the respondent, but all groups underestimate actual compensation. Lower income respondents (below $20,000) believe CEOs earn $500,000 ($9.7 million average), while higher income respondents ($150,000 or more) believe CEOs earn $5,000,000 ($14.9 million average).

But are the American people sufficiently populist to support government intervention? Here the results are mixed:

In terms of a solution, approximately half of respondents (49 percent) believe the government should do something to change current CEO pay practices, approximately one-third (35 percent) do not believe the government should intervene, while the remainder have no opinion.

Higher income respondents (38 percent) are much less likely to favor government intervention than middle income (55 percent) and lower income (52 percent) respondents. Republicans and Independents (36 percent and 47 percent, respectively) are also less likely to favor government intervention than Democrats (60 percent).

Given the rising tide of Democrats who are okay with socialism, I suppose it's not surprising that they tend to favor statist solutions. But what I'd really like to have seen is a break down not just by political affiliation and income, but by age. After all, aren't you curious to know if millennials really have all fallen for Bernie Sanders' style of class warfare?

Do shareholder care about say on pay disclosures or just results?

Just results, it appears:

This paper examines the impact of enhanced executive remuneration disclosure rules under UK regulations introduced in 2013 on the voting pattern of shareholders. Based on a hand-collected dataset on the pay information disclosed by FTSE 100 companies, we establish that shareholders guide their vote by top line performance, and appear to disregard the remaining substantial body of information provided to them.

Gerner-Beuerle, Carsten and Kirchmaier, Tom, Say on Pay: Do Shareholders Care? (January 22, 2016). Available at SSRN: http://ssrn.com/abstract=2720481

Dodd-Frank's executive compensation "reforms" have failed miserably

My UCLAW colleagues Steven Bank and George Georgiev have posted a concise and damning appraisal od Dodd-Frank's executive compensation provisions:

This essay argues that regulatory reforms introduced by the Dodd-Frank Act of 2010 in the area of executive compensation have not yet achieved their purpose of linking executive pay with company performance. The rule on shareholder say-on-pay appears to have had limited success over the five proxy seasons since its adoption. The rule on pay ratio disclosure, adopted in August 2015, and the rules on pay-versus-performance disclosure and the clawback of certain incentive compensation, proposed in April 2015 and July 2015, respectively, are also unlikely to succeed. For the most part, the rules are intuitive and well-intentioned, but a closer look reveals that they are easy to manipulate, counterproductive, and often interact with one another, and with other regulatory goals, in unintended ways. As a result, five years after the passage of Dodd-Frank, the decades-old goal of aligning pay with performance remains elusive.

Highly recommended.

Bank, Steven A. and Georgiev, George S., Paying High for Low Performance (August 7, 2015). 100 Minnesota Law Review Headnotes __ (2016); UCLA School of Law, Law-Econ Research Paper No. 15-11. Available at SSRN: http://ssrn.com/abstract=2641152

Guttentag's "On Requiring Public Companies to Disclose Political Spending"

My friend Loyola law professor Mike Guttentag recently sent me a reprint of his article On Requiring Public Companies to Disclose Political Spending, 2014 Colum. Bus. L. Rev. 593 (2014), which reminded me that I wanted to flag it for my readers. It is, put simply, the single best thing I've read on corporate political contribution disclosure.

Here's the abstract:

Mandatory disclosure is a central feature of securities regulation in the United States, yet there is little agreement about how to determine precisely what public companies should be required to disclose. This lack of consensus explains much of the disagreement about whether the Securities and Exchange Commission should require public companies to disclose political spending.

To resolve the political spending disclosure debate I therefore begin by considering the more general question of how to evaluate any proposed mandatory disclosure requirement. I show why the presumption should be against adding a new disclosure requirement, and then identify the kinds of evidence that should be sufficient to overcome this presumption. Applying this new analytic framework to the political spending disclosure debate—and basing this analysis in part on previously unpublished empirical findings—shows that public companies should not be required to disclose political spending.

Here's a link to the the law review page from which you can download the article.

The political agenda behind pay ratio disclosure

Holman Jenkins nails it:

Occasionally activists in the CEO pay wars show their hand honestly. Their goal is not to change CEO pay practices so much as flog eternal outrage over CEO pay for political purposes.

Under a Dodd-Frank rule finally imposed last week, activists have succeeded in forcing the Securities and Exchange Commission to force companies to compute a ratio showing the CEO’s pay in relation to the median worker’s, an arbitrary and uninformative mathematical exercise of no value to investors, just like the last such effort, and destined to have the same effect: zero.

So why bother? Jenkins explains:

Thirty-five years into the CEO pay boom, it’s hard to sustain outrage based on mere resentment. And yet the cause has morphed into a perma-cause for certain journalists, think tankers and labor lobbyists because executive compensation has become a piece of the chorus of grievance that’s supposed to make sure liberals get elected.

Jenkins left out the academic enablers who provide the activists with purportedly objective, nonpartisan cover, but otherwise he's right on target.

Hodak's unanswered questions about the SEC's pay ratio disclosure rule

Marc Hodak has a bunch:

How, exactly, will this “simple benchmark” help investors do those things? What number, or range, for this ratio tells an investor that a company is treating its average workers well or poorly, or that a company is paying its CEO reasonably? What economic or financial standards can be created using this or other data to enable investors to figure these things out?

It's hard to argue with Hodak's view that "the SEC is simply being used in an experiment in social engineering." It's equally hard to argue with his conclusion that the experiment will fail, as have so many before.

The beam in CalPERS's eye

Why do you notice the splinter in your brother’s eye, but do not perceive the wooden beam in your own eye? How can you say to your brother, ‘Let me remove that splinter from your eye,’ while the wooden beam is in your eye? You hypocrite, remove the wooden beam from your eye first; then you will see clearly to remove the splinter from your brother’s eye.

Keith Paul Bishop calls out CalPERS' hypocrisy:

A few weeks ago, CalPERS’ Director of Corporate Governance, Anne Simpson, sent a letter to the Securities and Exchange Commission in support of the SEC’s proposed pay for performance disclosure rule.  Her letter notes CalPERS’ belief that “Compensation of executives in publicly listed companies should be driven predominantly by performance.” ...

As noted last week, CalPERS’ Chief Investment Officer is California’s highest paid civil servant (excluding the UC system).  According to the Sacramento Bee’s state worker salary database, the CIO’s total pay for 2014 was $745,000, up over 36% from $547,000 for the year before.  According to Pensions & Investments, CalPERS is reporting preliminary and very anemic investment returns of 2.4% for its fiscal year ended June 30.  According to the same article, this is 5.1% below CalPERS’ assumed return.

In another post, Bishop takes a look at pay inequality at CalPERS and finds still more hypocrisy. 

Dodd Frank Invades Canada

My colleagues Steven Bank and George S. Georgiev teach executive compensation and corporate governance at the University of California, Los Angeles School of Law and are affiliated with UCLA’s Lowell Milken Institute for Business Law and Policy. They've got an op-ed in The Globe and Mail on how the SEC's new executive compensation rules will affect not just USA but also Canadian corporations:

The primary U.S. market regulator, the Securities and Exchange Commission, served up ... far-reaching rules on bonuses and other incentive-based compensation for all firms listed on U.S. stock exchanges, which include about 300 of Canada’s best-known multinational companies as well as more than 600 other international companies. This was a curious choice since the United States has traditionally allowed non-U.S. companies to follow their home-country rules on executive compensation and corporate governance instead of the SEC’s rules.

Even worse than the geographic overreach, however, is the fact the SEC’s new rules are likely to prove expensive, counterproductive and easy to manipulate. ...

Unlike U.S. companies, Canadian and other international companies have an even easier way out. They can simply choose to delist from U.S. exchanges and rely solely on their home-market listing. In fact, many non-U.S. companies did just that when they were faced with complex new corporate governance rules under the Sarbanes-Oxley Act in the wake of the Enron and WorldCom scandals of the early 2000s. Studies show that a U.S. listing confers advantages on non-U.S. companies, but the burden from the new rules may well outweigh these advantages, especially at a time when international markets are becoming increasingly competitive.

Of course, this is just one more example of the general phenomenon of which I wrote in Corporate Governance and U.S. Capital Market Competitiveness (October 22, 2010). Available at SSRN: http://ssrn.com/abstract=1696303:

During the first half of the last decade, evidence accumulated that the U.S. capital markets were becoming less competitive relative to their major competitors. The evidence reviewed herein confirms that it was not corporate governance as such that was the problem, but rather corporate governance regulation. In particular, attention focused on such issues as the massive growth in corporate and securities litigation risk and the increasing complexity and cost of the U.S. regulatory scheme.

Tentative efforts towards deregulation largely fell by the wayside in the wake of the financial crisis of 2007-2008. Instead, massive new regulations came into being, especially in the Dodd Frank Act. The competitive position of U.S. capital markets, however, continues to decline.

This essay argues that litigation and regulatory reform remain essential if U.S. capital markets are to retain their leadership position. Unfortunately, the article concludes that federal corporate governance regulation follows a ratchet effect, in which the regulatory scheme becomes more complex with each financial crisis. If so, significant reform may be difficult to achieve.