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The SEC targets executive pay.

The SEC Targets Executive Pay

With executive compensation featured as hard-hitting cover stories this spring in Business Week ("Are CEOs Paid Too Much?") and Forbes ("It Doesn't Make Sense"), along with widespread newspaper and television coverage, it did not take a whiz kid to figure out that it would not be long before Congress grabbed this emotionally charged issue.

And, on May 15, it did. Sen. Carl Levin (D., Mich.), chairman of the Oversight Committee on Government Management, and Sen. William Cohen (R., Maine), the ranking minority member, held a hearing on the subject called "The SEC and the Issue of Runaway Executive Pay."

Testifying were Professor Graef Crystal of the University of California (Berkeley) School of Business Administration; Nell Minow, President of Institutional Shareholder Services Inc.; Ralph Whitworth, President of United Shareholders Association; and Robert Monks, President of Institutional Shareholder Partners Inc. and former Administrator of the Department of Labor's Office of Pension and Welfare Benefit Programs. Following that panel, Linda Quinn, director of the Division of Corporate Finance at the Securities and Exchange Commission, was on the firing line.

While the first panel was very one-sided, I know that the Business Roundtable and several CEOs (whose compensation packages have recently made headlines) were asked to testify, and declined.

Sen. Levin's introductory remarks can be summarized in this one statement: "It's one thing to have spectacular pay increases for spectacular performance. It's another to have spectacular pay increases for dismal, or even mediocre, performance. To make it worse - we have a system where government interferes with the right of shareholders to challenge these whopping pay packages." The latter reference was to the SEC.

New legislation

The bottom line of this congressional scrutiny: Sen. Levin plans to introduce legislation giving the SEC increased authority to allow, on the proxy, shareholder proposals that address the process, structure, and objectives of top executive compensation.

Last year, the SEC allowed some 30 shareholder proposals addressing golden parachutes to be placed on proxies. However, proposals dealing with executive compensation have previously been rejected, since compensation is considered "ordinary business" and not subject to shareholder vote in the proxy.

My reading of the May 15 Senate hearing, as well as discussions the National Investor Relations Institute officers had in March with the SEC staff on their current comprehensive review of the proxy process, is that this is going to change.

The SEC is under tremendous pressure, particularly from institutional investors and organizations such as the Council of Institutional Investors, Institutional Shareholder Services, the United Shareholders Association, and now from some members of Congress on both sides of the aisle, to do something.

It appears that the SEC will not seek - and probably does not want - additional legislative authority in this area.

Instead, the Commission will say that the current authority is adequate, but it will probably, in the future, look at certain aspects of executive compensation as not being "ordinary business" and, therefore, may allow shareholder proposals in the proxy that are proper under state law and that do not specifically set executive compensation levels. In other words, the SEC might allow shareholder proposals amending bylaws relating, for example, to the composition of the compensation committee.

Additionally, proposals that are not related to bylaw changes, which are advisory in nature and nonbinding, might also be allowed on the proxy. These proposals might establish the criteria or standards to be used in setting compensation levels while not establishing a specific level of pay.

The other area in which the SEC is under fire relates to disclosure of executive compensation in the proxy.

Critics say it is much too difficult for shareholders to determine the-bottom line of top executive compensation from reading the proxy. They want a total compensation figure in chart form for top executives - one that is easy to read and is not "buried" throughout the proxy.

What's more, we learned in our March meeting with the SEC staff that it is also considering requiring, for disclosure purposes, a five-year historical chart relating corporate performance and executive compensation.

We explained to the staff that this kind of comparison could be very misleading in terms of all the factors that go into consideration of executive compensation. But Linda Quinn mentioned in her testimony at the May 15 hearing that this is one of the proposals that the SEC staff is considering recommending to the Commission in the near future.

The SEC's review of the proxy process was initiated by a November 1989 letter from the California Public Employees' Retirement System (CalPERS). The CalPERS letter suggested numerous proposed changes to the proxy system. It seems that the SEC will submit to the Commission proposals from this review on a piecemeal basis, with the first being one on disclosure of executive compensation. We might expect that proposal sometime this summer. As one SEC staffer told me after the May hearing, "We're going to be burning the midnight oil on this one."

Action agenda

What can Corporate America do as these SEC initiatives take shape?

Those companies that are members of the Business Roundtable or the National Association of Manufacturers should use their lobbying power to see that the SEC does not open the proxy to a supermarket of frivolous proposals. Be especially watchful that the SEC's interpretation of "ordinary business" does not allow proposals that usurp management's ability to run the corporation or control the destiny of the company.

That door was cracked open last year when the SEC allowed a proposal on the Philip Morris Cos. Inc. proxy calling for the company to get out of the tobacco business by a certain date. Obviously, it did not pass, but those kind of proposals deal with the ordinary business of the company and are not normally the subject of a shareholder advisory vote.

Stay on top of the issue and work with the SEC staff to provide input as it prepares its proposals for the Commission's decision. And, once these proposals are put out for public comment, be ready to submit formal comments.

Louis M. Thompson Jr. is President and Chief Operating Officer of the National Investor Relations Institute, the Washington, D.C.-based organization of investor relations practitioners.
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Title Annotation:Who Owns Corporate America; Securities Exchange Commission
Author:Thompson, Louis M., Jr.
Publication:Directors & Boards
Date:Jun 22, 1991
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