The Conference Board Governance Center Blog


The Importance of Commenting on the Proposed CEO Pay Ratio Rules

By Jim Barrall, Partner, Latham & Watkins LLP

In my last post on the SEC’s proposed CEO pay ratio rules, I recommended that companies determine the work they would need to do to comply with the rules and comment on them before the SEC’s current deadline of December 2. Although the U.S. Chamber of Commerce and other organizations have requested additional time to comment on the rules for compelling reasons, companies should not assume that the deadline will be extended. Moreover, recent developments underscore the importance of company input.

On October 3, SEC Chair Mary Jo White gave a speech at the Fordham Law School which all should read, titled “The Importance of Independence,” in which she described the SEC’s mission, chronicled its apolitical independence since its founding, and forcefully argued that its independence deserves more respect from industry and Congress. In the speech, Chair White recognized the importance of disclosure to investors, but stated that disclosure which strayed beyond the SEC’s core purposes could lead to information overload which would harm investors. She also noted that certain Congressional mandates appeared more directed at exerting societal pressures on companies to change their behavior rather than at disclosing financial information to inform investment decisions. While she did not mention the CEO pay ratio rules by name, her discussion of conflict minerals disclosures and questioning the wisdom of using the federal securities laws and the SEC’s power of mandatory disclosure to accomplish political and social goals, apply with full force to the CEO pay ratio rules. Any reader can easily connect these dots by reading Chair White’s speech alongside the CEO pay ratio rules release, which states that neither the statute nor its legislative history states its objectives or intended benefits or a specific market failure that it was intended to remedy, and makes it abundantly clear that the SEC only issued the rules because the statute compelled it to do so.

Additional support for the importance of company input was recently provided by Meredith Cross, the former Director of the SEC’s Division of Corporation Finance, in a PLI speech in which she predicted that the Congress was likely to continue to require the SEC to issue disclosure rules intended to effect social and political goals and questioned whether the SEC should bear the brunt of furthering political and social goals, which are outside of the SEC’s stated mission and area of expertise.

Finally, the SEC has already started to receive comments on the proposed rules, some of which criticize the SEC’s attempts to balance the very dubious benefits of the statute with the administrative costs of the disclosure by allowing companies flexibility to determine their median compensated employees. Companies therefore should not assume that the final rules could not be more burdensome than the proposed rules and need to support what the SEC has done, as well as suggest improvements.

While many larger companies, particularly those with complex organizational structures with multiple business and geographic segments, face special burdens and likely will file extensive comments addressing many of the specific SEC requests for comments, all companies should seriously consider filing at least brief letters addressing the following points:

  • Supporting the importance of the SEC’s independence and of not over-burdening it or investors with additional disclosure requirements motivated by political or social goals which are not central to investment decisions, because they are outside the SEC’s mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.
  • Stating whether their investors have indicated that they believe that CEO pay ratios are important to their investment decisions.
  • Supporting the rules’ flexibility in allowing companies to use sampling techniques, reasonable estimates, and consistently applied compensation measure to find their median employee.
  • Distinguishing the determination of the median employee from the determination of the median employee’s total compensation, the latter requiring use of the SEC’s summary compensation table rules and which will result in an apples-to-apples comparison of the CEO’s total compensation to the median employees total compensation.
  • Supporting the SEC’s determination that the rules should not require additional disclosures or inflexibility in attempting to facilitate comparisons of CEO pay ratios among companies because of the additional burdens and costs that would impose and because it could lead to potentially misleading conclusions and unintended consequences given inherent differences in companies’ business models.
  • Providing as much quantified and empirical data as practicable on the estimated initial and ongoing costs of the complying with the rules, flexible as they are in many areas.

The impact of the CEO pay ratio rules on companies and investors, and the role of the SEC and disclosure to investors, are important matters on which the SEC, the Congress, and investors need to be educated. Companies need to make their voices heard and should not count on others to state their cases on the rules or to support the SEC’s independence in carrying out its important and apolitical mission.

About the Guest Blogger:

James D. C. Barrall, Partner, Latham & Watkins LLP

James D. C. Barrall, Partner, Latham & Watkins LLP

James D. C. Barrall is a partner in the Los Angeles office of Latham & Watkins LLP and is the Global Co-Chair of the firm’s Benefits and Compensation Practice. Mr. Barrall specializes in executive compensation, corporate governance, employee benefits, and compensation related disclosure and regulatory matters.

Mr. Barrall is a frequent author, contributing editor, and lecturer on executive compensation, corporate governance, disclosure, and other regulatory matters. He is a co-author of the chapter on extensions of credit to directors and officers in the American Bar Association’s Practitioner’s Guide to the Sarbanes-Oxley Act.

Mr. Barrall has lectured at the UCLA Law School, the UCLA Anderson School of Management, and the Aresty Institute of Executive Education at the Wharton School, University of Pennsylvania. Mr. Barrall is a member of the Board of Advisors of the UCLA School of Law and the Lowell Milken Institute for Business Law and Policy.

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