Corporate Governance

Executive Compensation, a Divided Commission, and the Consequences of Dissent (Part 2)

By J Robert Brown Jr.

The proposed rules (those commanded by Dodd-Frank and jointly written in conjunction with other banking agencies) were proposed by the Commission yesterday.  The rules passed by a 3-2 vote. 

The reasoning of the dissenting commissioners is here and here.  The basis for opposing the proposal?  The substantive requirements will remove "important decision making authority from those who oversee the firms" and they reflect a one size fits all approach to regulation ("optimal compensation arrangement can vary firm-by-firm and individual-by-individual").   But objections and concerns can be expressed without voting no.  Commissioner Atkins voted in favor of the original shareholder access proposal back in 2003 but registered his concerns in the accompanying statement and expressed hope that the comment process would help provide some of the necessary clarification. 

So what is the effect of the actual dissent? 

For one thing, it is terribly demoralizing to the staff.  This is an agency that got a huge increase in regulatory responsibility without any concomitant increase in funding.  People there are working harder under severe limits (travel restrictions in inspections for example).  With respect to these proposals, the staff knows that if there is a shift of one commissioner (say one of the three in the majority resign), the proposal and all the hard work will be for naught.  It can be tough to motivate people in these circumstances. 

This has happened in recent years.  When Commissioner Campos resigned, the Commission lacked a majority to pass the access proposal that had been distributed for comment.  As a result, all of the hard work by the staff in issuing that proposal was potentially wasted.  

Conversely, the dissent is liberating.  The staff know that, by voting against the proposal, the two commissioners will likewise vote against the final rule when it is proposed, assuming the substantive requirements remain in place.  That means that the rule can be written without worrying about the views of the dissenting commissioners. 

Only the collective wishes of the three remaining commissioners matter.  These three commissioners are likely to have some differences but they will not be anywhere nearly as wide as those with the dissenting commissioners.  Moreover, by dissenting on the entire proposal over an objection with only one part, the two commissioners lose their voice for the entire proposal.  Thus, while there will be issues connected to the substantive proposals, there will likely be issues connected to the proposed disclosure requirements as well.  Yet with the dissenting commissioners already announcing opposition to the proposal, their views need not be reflected in the disclosure portion of the final rule. 

Sometimes a dissent is effective.  It can impose limits on the staff.  The staff (and Chair) would prefer a unanimous Commission.  They work hard at compromising where they can to bring everyone aboard.  Yet when dissents become too common, they can lose effectiveness.  It remains to be seen whether this is an example of a dissent too far. 

Full post as published by The Race to the Bottom on March 03, 2011 (boomark / email).