Good grief! What's with the SEC and exec pay?
By Gerard F. Hurley

Spencer Stuart / DirectorS & Boar DS Director S r oSter 16 directors & boards T he SEC is forcing a sampling of 350 public companies to more specifically disclose the compensation, benchmark- ing, and forecasting decisions of their boards and compensation committees. This insistence on increased disclosure — in the “public interest of helping in- vestors better discern” this information — bodes ill for all fiduciaries, whether public, private, or not-for- profit. This intervention must be turned back by the corporate communit y before cr itical leadership prerogatives have been destroyed forever. Where is the outrage that this government is continu- ing to insert itself in boards’ c o n f i d e n t i a l d e c i s i o n s o n “how the company arrived at particular levels and forms of compensation”? Isn’t the ROI of a CEO’s c o m p e n s a t i o n m e a s u r e d , w i t h o t h e r f a c t o r s , i n t h e corporation’s ability to make a year-end profit ... even to grow? That’s the key investor measure, not salar y numbers and perks. How the company’s management and b o ard (represent- ing the shareholders) generate that net profit is the magic of competition. Do we need, much less want, bureau- crats — who have no skin in the game — to comment on inside decisions out- side their expertise? This, frankly, is none of their business under any pretext. “But, a lot of investors want more in- formation,” I’m told. I don’t want to be rude, but “So?” Does that desire trump everything? Have you considered what director independence and latitude is being fur ther eroded by these intru- sions? Item 402 of SEC Regulation S-K, ac- cording to the Commission, requires a company to provide “clear, concise and understandable disclosure of all plan and non-plan compensation awarded to, earned by, or paid to the named execu- tive officers ... and directors ... by any person, for all services, ren- dered in all capacities” (em- phasis added). What is meant by disclo- s u r e? Wh a t i s r e q u i r e d t o satisfy that? This disclosure effor t has been around for some time, but how did we let it get to this level of pre- dicament? R e p o r t e d l y f r o m o t h e r sources, the SEC is also con- cerned about the dispar it y of the compensation levels between the No. 1 and No. 2 executives. Is that a public interest? Who are any of us outside a company to prevent its board from being either profligate or penurious, or even silly, regarding CEO/ COO compensation? Study the 10-page Corporate Finance Div ision’s “Staff Obser vations in the Re v i e w of Exe c ut ive Com p en s a t i on Disclosure” memo drafted in October 2007, with its “how we can all play better with others” tone. The SEC staff urges us, please, to use “plain English ... no boilerplate.” On the filings from the 350 firms, “some were clear and understand- able, yet not meaningful … (while oth- ers were) ... responsive in content, but not clear and understandable.” This staff memo is frontloaded with assurances, such as “we suggested ... we encourage ... should be ... our goal ... to help the reader ... we sought a broad range ....” And get this, to disarm: “No one (among the 350 firms) should in- terpret (its selection) as any indication of our view regarding the quality of that company’s disclosures.” Even more: “ Throughout our long histor y” — you know us! — “we have found that, where a company empha- sizes material information, investor un- derstanding of (a) company’s disclosure is improved ... more concise information regarding compensation, related-person transactions, beneficial ownership and corporate governance matters can facili- tate more informed investing and voting decisions in the face of complex informa- tion about these important areas” (em- phasis added). Our economy relies on a rational, transparent capital system. How public corporations thrive, within the law, is their competitive secret. Even consider- ing that one can ask for confidentiality, such demands for disclosure will not only undermine competition by disclos- ing corporate decisions but will, in short order, set up averages, ranges, standards, predicates, justifications, and maximums/ minimums most likely leading to “under this combination of circumstances com- panies are expected to ....” Such will then, for certain, be imposed under pain of fines, exclusions, denials of board and CEO latitude, you name it. Play out the scenario. Where will it end? We are continually reminded that in- dependent directors are fiduciaries ful- filling their responsibilities on behalf of shareholders, and that CEOs work for those board directors. Let the directors fiduce. Let shareholders inform them- selves once inside the lodge. Let poten- tial investors who want seats at the table do their ow n homework. And let the SEC realize it is getting inappropriately “interested” in the competitive dynamics of compensation decision making. ■ The author can be contacted at jhurley@aerg. org. 16 directors & boards Gue St column Good grief! What’s with the SEC and exec pay? This government is continuing to insert itself unwisely in boards’ confidential decisions. Where is the outrage? By GerarD F. Hurley Gerard F. Hurley is president of Asso- ciation Executives Resources Group, Gaithersburg, Md. (

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