Corporate Governance

Public Companies (Still) Reluctant to Follow SEC?s Executive Compensation Disclosure Rules

By Jim Hodgson

As we reported last fall, the SEC marked the unhappy anniversary of its new executive compensation disclosure rules, which require public companies to reveal exactly how they compensate their top executives.  (Please see PomTalk post of November 13, 2007.)  To review briefly, the SEC identified 350 public companies whose executive compensation disclosures failed to meet the Commission?s new guidelines.  Broadly speaking, the SEC found that when such disclosures were clear and understandable, they tended not to be meaningful or responsive to disclosure requirements.  Conversely, when the disclosures were responsive in content, that content tended to be obscured by arcane and convoluted terms.  The Commission?s observations of last November underline the fact that the new rules are intended to motivate companies to explain, in concise and clear language, how and why they arrived at specific executive compensation decisions and policies.

The SEC sent comment letters to those 350 public companies last fall, requesting that they correct and enhance their executive compensation disclosures going forward.  Well, a majority of those companies have now received second letters.  And it appears that something of a stalemate has developed ?- with the Commission pushing for still more transparency, and certain companies balking at the prospect of having to reveal information that they consider confidential.  Such is the reluctance to publicize specific individual performance measures that many companies may alter their executive compensation rubrics to reflect companywide performance goals ?- rather than individual performance goals.  Such targets (which would focus on company earnings or stock price rather than on more sensitive figures like return on capital) would be more palatable for these companies to disclose publicly.

One should be concerned, though, that such a shift might represent a detriment to shareholders.  These reticent companies, which have now stated publicly that there are limits on what they are willing to disclose to the SEC, might unwittingly be thrust into an over-obsession with short-term measures like quarterly earnings and stock prices ?- a situation reminiscent of the dot-com era and one prone to inspire fraud.  This unintended consequence need not come to pass, however.  Not all companies are rebelling against the SEC?s efforts to put more information on executive compensation into the hands of investors.  Rather, many have promised the SEC the enhanced disclosure that it seeks.  Such companies, like Bristol-Myers and Boston Scientific, should be encouraged to continue reforming themselves in the way that they bring executive compensation disclosures in line with the Commission?s new guidelines.

Full post as published by PomTalk on January 31, 2008 (boomark / email).