Corporate Governance

IPOs and Executive Compensation

By J. Robert Brown

The Journal has noted that some companies incur "culture shock" when they decide to go public and have to confront the executive compensation disclosure requirements.  The article compared the level of compensation disclosure in the MasterCard IPO (before the 2006 changes) and the Visa IPO (after the 2006 changes), with the former providing 15 pages of disclosure, the latter 30 pages.  The fault is more or less placed at the feet of the SEC, the agency responsible for the complex disclosure requirements.

The piece, however, entirely misses the point of this phenomena.  First, as almost a throw in, the piece notes that "[p]ublic companies are continually trying to balance what they must disclose against what they would rather not, say attorneys who specialize in regulatory filings."  But isn't there another way of saying this?  Companies don't want to reveal particular compensation practices.  They don't disclose all conflicts of interest that can exist with compensation consultants.  They don't want to disclose the standards for paying performance based compensation, particularly bonuses, because they don't have them (or, said another way, they want discretion unbounded by standards).  In some cases the compensation practices are just embarrassing (country club dues, for example).  The result has been increasingly complex disclosure requirements designed to box in companies and not allow them to avoid disclosing the type of information they know investors need and want.  In the battle of standards versus rules, this is a place where only rules will work.  

Second, this problem arises from the standards (or, more accurately, lack of standards) set by the Delaware courts in the realm of executive compensation.  Because process (and bad process at that) trumps fairness (see Returning Fairness to Executive Compensation), boards do not actually have to have standards designed to ensure that compensations are fair.  As a result, the SEC has been using increasingly complex disclosure requirements to force on boards a discipline with respect to executive compensation that state law has declined to require.  Limited to disclosure, however, the SEC has met with only limited success in affecting board behavior.

Having said all of that, disclosure of compensation can, on the margin, be a reason to avoid a public offering.  Sometimes CEOs of privately held companies do not want their investors (or fellow executives) to know precisely how much they make.  The public offering will put paid to that idea.

Full post as published by The Race to the Bottom on December 10, 2008 (boomark / email).