Disclosure for Disclosure’s Sake: Sections 951 & 953;
Clear Disclosure, “Say on Pay” and “Say on Golden Parachutes”
Among the numerous executive compensation provisions in the Dodd-Frank Act is a subset of provisions that are thematically correlated via the concepts of both (1) disclosure and (2) the nonbinding approval (or not) of what is actually disclosed. While increased disclosure requirements for executive compensation may seem like a perfectly logical addition to the Act – in accordance with the Act’s expressed “consumer protection” aims – what is more puzzling is the extent to which this Act goes to allow shareholders to vote on this newly-disclosed compensation in a completely non-binding (and apparently fruitless) way.
These new and peculiar provisions are contained within Subtitle E: Accountability and Executive Compensation of the Act in Sections 951 and 953, respectively. Section 953 contains the bulk of the “disclosure only” provisions. The most prominent of these disclosure requirements are the §953(a): Disclosure of Pay Versus Performance and §953(b): Median, Annual and Ratio Disclosures. The former of these two provisions requires that any public company registered with the SEC (both financial and non-financial, alike) must disclose in any proxy or solicitation material for an annual meeting of shareholders the relationship between the executive compensation paid by the issuer and the financial performance of said issuer. In disclosing the aforementioned “relationship” the issuer must take into account any change in share value and any distributions paid throughout the year. The purpose for this disclosure appears to be so that the shareholders will be able to make a correlative assessment of the executives’ “value” as it relates to the value of the shares. This premise is made quite apparent by the suggestion in §953(a) that issuers include a “graphic representation” of this information in the proxy/solicitation materials.
Section 953(b) continues this trend, but in a much broader scope. The requirements of §953(b) are that public companies must disclose the following three items collectively: (A) the median annual total compensation paid to all employees in the company, (B) the annual total compensation of the chief executive officer and (C) the ratio of the amount in (A) to the amount in (B). The apparent purpose of §953(b), therefore, is to highlight any gross disproportions between the CEO’s compensation and the average employee’s compensation. Boldly, however, these disclosures are not required to be made simply in the annual proxy/solicitation statements of the issuer. Instead, these disclosures must be made in any filing of the issuer. That is, any time the issuer publicly files anything with the SEC (including the solicitation/proxy materials) these figures must also be current and accurately disclosed.
Notwithstanding the general and frequently-echoed criticism that the Dodd-Frank Act, as a whole, far overreaches its promised intent; the specific legislative intent behind section 953 is evidenced largely through its specific language. As referenced in the Act, existing executive compensation disclosures have been required by the SEC for many years. For instance, the executive compensation table requirements were in existence long before the recent financial crisis. What, then, would be the point of requiring more (and/or possibly duplicative) executive compensation disclosure requirements in the Dodd-Frank Act? In a word: Clarity. That is, although these compensation requirements are available to all shareholders via public filings with the SEC, they are typically buried deep within large and complex filing statements that most shareholders will not take the time to dissect. By implementing the new rules as dictated in §953, the drafters of the Dodd-Frank Act sought to make more clearly available the compensation figures (and ratios to “rank-and-file” employees) of top executives.
By using language not seen in other, similar SEC provisions, this section demonstrates that clarity, simplicity and transparency are the main legislative goals of the section. For example, the use of the phrase “clear description” in section 953 as opposed to simply “shall disclose” (which used in other, existing SEC regulations on executive compensation disclosures) shows that the legislative intent here was aimed at de-mystifying the bottom line of executive compensation in more “layman” terms. That is, because the existing legislation already requires that the figures be disclosed, new legislation requesting that it be disclosed more clearly, negatively infers that previous disclosure requirements (of the same information) were not being done clearly enough. The next logical inference, therefore, is that the layman terms are necessary as to be more clearly understood by, the layman. This point, especially when coupled with the “ratio of CEO pay to median employee pay” requirement, makes clear that the target audience for this section (and the information contained therein) is the average, layman investor. But how does creating more clarity for the layman investor help advance “wall street reform”?