Wednesday, February 15, 2012

Institutional Investors Urge SEC to Adopt Dodd-Frank Corporate Pay Ratio and Pay for Performance Regulations

A consortium of institutional investors led by CalPERS have asked the SEC to adopt regulations implementing the remaining Dodd-Frank executive compensation provisions of the Act, including the pay ratio and pay for performance provisions of Section 953of the Act. In a letter to the SEC, the institutional investors noted that the inaugural year of shareholder advisory votes on executive compensation demonstrated the importance of the link between pay and performance through the increased dialogue taking place between corporations and shareowners. The SEC must still adopt regulations regarding disclosure of pay for performance, pay ratios, hedging by employees and directors, and the recovery of executive compensation. The investors said that the adoption of these final rules will better define the parameters of the discussion and further expand the dialogue opened in 2011. In addition to CalPERS, the letter was signed by, among others, the Ohio Public Employees' Retirement System and the Office of New York City Comptroller.

The institutional investors also urged the SEC to renew rulemaking for universal proxy access by addressing the issues raised in the 2011 DC Circuit Court decision that vacated the SEC’s proxy access rule, Exchange Act Rule 14a-11. The institutional investors believe that proxy access is a fundamental shareholder right to nominate director candidates who can be considered on a level playing field with board or management candidates. The term proxy access is shorthand for a framework of rules under which a shareholder may require the corporation to include in its proxy statement and proxy card a person nominated by the shareholders, but not by the board of directors, for election to the board.

A panel of the DC Circuit Court of Appeals ruled that the SEC was arbitrary and capricious in promulgating the proxy access rule. Among other things, the appeals panel found that the SEC’s discussion of the estimated frequency of nominations under Rule 14a-11 was internally inconsistent and therefore arbitrary. The appeals court also found that the Commission relied upon insufficient empirical data when it concluded that Rule 14a-11 would improve board performance and increase shareholder value by facilitating the election of dissident shareholder nominees. Business Roundtable and Chamber of Commerce v. SEC, DC Circuit, No. 10-1305, July 22, 2011.

In their letter, the institutional investors also requested the SEC to revive the Investor Advisory Committee and appoint the Investor Advocate. The Investor Advisory Committee will provide an important role on matters of concern to investors in the securities markets; provide the Commission with investors’ perspectives on regulatory issues; and serve as a source of information and recommendations to the Commission regarding its regulatory programs from the point of view of investors.

The consortium also asked the SEC to provide for an accountable and transparent ratings system with full disclosure on data and models used to develop securities ratings. More specifically, there is a need to develop an independent mechanism to track the accuracy and effectiveness of the ratings process and complete the study of financing alternatives for credit rating agencies.

Finally, the institutional investors urged the SEC to clarify and ensure compliance with the Commission’s interpretive guidance on climate risk disclosures and include climate change disclosure and the process for including diversity considerations into the corporate board nomination process in the newly created Investor Advisory Committee’s overall mandate to provide advice and recommendations. The SEC should also ensure that relevant environmental, social, governance and diversity reporting is integrated into financial reporting frameworks.

More broadly, the institutional investors said that, despite enactment of the Dodd-Frank Act, there is a growing movement to undercut the goals of market reform. If this movement is successful, they warned, there is the very real risk that investor confidence will erode. The Commission plays a vital role in bolstering investor confidence in the public markets by adding transparency for investors, enforcing director independence, and enhancing governance. The institutional investors stand ready to assist the Commission combat efforts to weaken or roll-back the important investor protection provisions of the Dodd-Frank Act.