By James Hamilton, J.D., LL.M.
SEC Chair Mary Schapiro outlined a bold corporate governance initiative to ensure that shareholders fully understand how compensation structures and practices drive an executive's risk-taking. This is in keeping with the Financial Stability Board’s principles for executive compensation reform, which were endorsed by the G-20 leaders in their final communiqué. In remarks to the Council of Institutional Investors, the Chair also discussed additional corporate governance disclosure initiatives.
The SEC Chair said that the Commission will consider whether its compensation disclosure rules accomplish the objective of providing shareholders with the most relevant information. Noting that compensation drives behavior, she mentioned that the Counterparty Risk Management Policy Group identified compensation schemes as one of five primary driving forces of the turmoil.
She observed that the Financial Stability Board (formerly Forum) issued a report agreeing with this assessment, and suggesting principles for sound compensation practices, including an effective alignment of compensation with prudent risk taking; and effective supervisory oversight and engagement by stakeholders.
The Commission will be considering whether greater disclosure is needed about how a company manages risks, both generally and in the context of setting compensation. The SEC will not mandate any particular form of oversight, noted the Chair, because that, not only would be beyond the Commission's traditional disclosure role, but would also suggest that there is a one-size-fits-all approach to risk management. Instead, the SEC will seek to provide investors, and the market, with better insight into how each company and each board addresses what the Chair described as ``these vital tasks.’’
The Commission will also consider whether greater disclosure is needed about a company's overall compensation approach, beyond decisions with respect only to the highest paid officers, as well as compensation consultant conflicts of interests
On other corporate governance matters, the SEC, in June, will consider whether to enhance disclosure around director nominee experience, qualifications and skills. The current rules only require a very brief description of a candidate's business experience over the past five years. In Ms. Schapiro’s view, that may not be sufficient in today's complex business environment. She wants to make sure that shareholders have the information needed to make sound proxy voting decisions.
The SEC will also consider whether boards should disclose to shareholders their reasons for choosing their particular leadership structure, whether that structure includes an independent chair, a non-independent chair, or a combined CEO/chair.
Next month, the Commission will consider a proposal to ensure that a company's owners have a meaningful opportunity to nominate directors. The SEC will look at what the Commission considered in both 2003 and 2007; and will also consider the potential impact of proposed changes to Delaware's corporate law. But the SEC Chair pledged that the Commission would view these issues with "fresh eyes."