The Securities and Exchange Commission on Wednesday, June 20, issued a final rule establishing minimum standards that exchange-listed companies will have to meet to determine executive compensation. The new rule gives stock exchanges considerable leeway in determining how to implement the new standards.
Rejecting calls from some labor and consumer groups that the SEC itself set standards -- some groups had wanted the agency to require that companies establish independent compensation committees, set criteria for "independent" directors and set criteria for deciding which company attorneys had "conflicts" -- the SEC said stock exchanges will have to ensure that their listed companies employ compensation advisers or compensation committees that carefully evaluate a variety of compensation issues.
"It is disappointing," said Robert J. Jackson Jr., an associate professor of law at Columbia University. He said the SEC, which had seen its attempt to ease proxy access rules overturned by an appellate court over cost-benefit questions, seemed to consider those questions more important than protecting investors.
"They seemed to make a rule that was unobjectionable to those most likely to sue," he said. He said the rule uses cost-benefit analysis submitted by the U.S. Chamber of Commerce and others in rulemaking to prevent lawsuits.
Vineeta Anand, chief of research for the AFL-CIO's Office of Investment, also complained that the SEC hadn't acted strongly enough.
"It's unfortunate that corporate lobbyists have blocked or slowed down rules necessary to disclose executive compensation," she said. "It's now three years after Dodd-Frank, and CEO pay is out of control, but for the most part the SEC has passed the baton to the stock exchanges."
The SEC required that stock exchanges set standards for, among other things, the independence of the members on a compensation committee and the committee's responsibility for the appointment, compensation and oversight of the work of any compensation adviser. The SEC didn't set any particular standards.
Each element of the test gets more detailed scrutiny. For instance, compensation committees have to weigh whether compensation advisers have other company business that could influence recommendations.
Compensation consultant Steven C. Root, managing director of Steven Hall & Partners LLC, praised the SEC for leaving compensation to compensation committees and exchanges.
"What we originally didn't know was how much of this would mandate," he said. He suggested the agency took a wise course in saying criteria had to be considered but leaving implementation up to the committee and board.
Jackson said he had been hopeful that the agency would set some minimum standards for "badly conflicted lawyers" that would have been similar to its earlier standards for conflicted directors.
"It seems they were more focused on the cost of disclosure than protecting investors," he said.
SEC Chairman Mary L. Schapiro said in a statement the rule will help investors.
"This rule will help to enhance the board's decision-making process on executive compensation matters, particularly the selection, engagement and oversight of compensation advisers, and will provide more transparency with respect to conflicts of interest of consultants engaged by boards," she said.
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