Corporate Governance

Corporate Governance and the SEC: The Impact of the Stimulus Bill (State Law Preemption) (Part 5)

By J. Robert Brown

As a final post in this series, we note some additional provisions in the Stimulus Act that do not specifically expand the SEC's authority but are worthy of comment.

In addition to a compensation committee consisting of independent directors, TARP dips directly into the governance process.  The compensation committee must meet at least semi-annually and must "discuss and evaluate employee compensation plans in light of an assessment of any risk posed to the TARP recipient from such plans."  In other words, the legislation preempts state law by dictating the minimum number of meetings and by prescribing at least some of the tasks that must be undertaken by the committee.  This was done in SOX with respect to audit committees.  See Rule 10A-3, 17 CFR 240.10A-3. 

While these provisions are not as detailed as those required for audit committees, there is a profound difference in the regulatory approach of the two laws.  In SOX, the requirements were imposed as a listing standard.  Listing standards do not currently provide for a private right of action.  Moreover, the exchanges have historically had issues with enforcement of their own rules.  For a mix of posts on the subject, go here, here and here.  The topic is also discussed at length in Essay: Corporate Governance, the Securities and Exchange Commission, and the Limits of Disclosure.  The provisions in TARP are not listing standards but substantive requirements imposed directly by the statute.  The relevant federal agencies can enforce them.

In addition, TARP now requires that boards put in place a "company wide policy regarding excessive or luxury expenditures, as identified by the Secretary." The provision lists topics that "may" be included. The list is predictable and includes: "(1) entertainment or events; (2) office and facility renovations; (3) aviation or other transportation services; or (4) other activities or events that are not reasonable expenditures for staff development, reasonable performance incentives, or other similar measures conducted in the normal course of the business operations of the TARP recipient." 

That federal law must dictate this demonstrates how little is required of boards under Delaware law.  If directors already had to do this under state law, there would be no need to have federal standards.  The provision, therefore, is a reflection of the utter lack of standards under state law.  The one irony of the requirement though, is that it might actually encourage remodeling and personal use of aircraft.  In identifying "excessive" expenditures, the board will, by definition, be defining a category of expenditures that are not excessive.  Thus, offices can be remodeled as long as they fall under the "excessive" standard.

With respect to these provisions, the SEC needs to improve disclosure.  The Commission should require all disclosure of the analysis employed by the compensation committee in connection with its review of the TARP requirements.  With respect to the excessive expenditures, the Commission should mandate disclosure of the policy.

For more on the subject, see Essay: Corporate Governance, the Securities and Exchange Commission, and the Limits of Disclosure.

Full post as published by The Race to the Bottom on February 28, 2009 (boomark / email).