The surprising November election results have created significant potential for reform with respect to executive compensation and corporate governance matters. From a legislative perspective, the House Financial Services Committee is expected to reintroduce and consider a version of the Financial CHOICE Act, which is likely to repeal the Dodd-Frank pay ratio, conflict minerals and proxy access mandates, as well as the financial industry incentive compensation and hedging requirements, adjust the clawbacks and Say on Pay requirements, and incorporate a new oversight regime for proxy advisory firms, among other changes. However, with health care and tax reform being the top legislative priorities, the initial action is likely to occur through regulatory changes at the SEC.
Regulatory changes are likely to be made more quickly than legislative changes, and the two approaches are not mutually exclusive.
In a statement titled “Reconsideration of the Pay Ratio Rule Implementation,” Acting SEC Commissioner Piwowar solicited comments from companies on the “unanticipated compliance difficulties” they have experienced in getting ready for the rule. Many companies and groups, including the Center, submitted detailed comments explaining the time, effort and expense companies have already spent in determining how to comply with the pay ratio even though few investors consider the information material. Commenters also explained how those burdens could be reduced. Acting Chair Piwowar directed the staff to reconsider the rule’s implementation and raised the possibility of additional guidance or regulatory relief. This raises the potential that the SEC may re-open the final rules and make changes, a process that could potentially delay the 2018 implementation. Earlier, the Acting Chair initiated a similar process for conflict minerals.
In the meantime, companies should share their pay ratio compliance experiences as part of the regulatory process that may revise these mandates, while continuing preparations to disclose their pay ratio in 2018 … at least until directed otherwise.
Tim Bartl is the President & CEO of the Center On Executive Compensation, a Washington, D.C.-based research and advocacy organization dedicated to providing a reasoned perspective on executive compensation. In this role, he is responsible for overseeing all of the Center’s operations. The Center is a division of HR Policy Association, which represents the Chief Human Resource Officers of more than 360 leading companies, and all of the Center’s Subscribers are HR Policy Members. Bartl also serves as Executive Vice President and General Counsel of HR Policy Association.
Potential legislative changes could dramatically affect the executive pay and governance landscape in the near future. The uncertainty surrounding these possible changes impels companies to act offensively instead of defensively by considering the following items:
Overall, companies should be acutely aware of the dynamism surrounding potential legislative and regulatory matters so that internal and external resources are used optimally. Recent history has taught us one thing we can be certain of in today’s world: The final form of any tax or regulatory legislation could vary drastically from the current thinking and expected implementation time frames.
David Thieke is a Principal in the Dallas office of Mercer’s executive rewards consulting practice. He specializes in the strategy, analysis and design of cash and equity-based compensation programs for executives and boards of directors. He works extensively with large global companies on annual and long-term incentive plan strategies and designs, identification of current compensation trends, pay for performance reviews, and competitive market benchmarking.
While the contours of Republican legislative plans related to corporate governance and executive pay have now emerged—including a likely rollback of many Dodd-Frank requirements, for example—much uncertainty remains, and the reform process may take longer than campaign language suggested. It is thus important for companies to continue outreach efforts to shareholders and ensure that their governance provisions are well-articulated and represent best practices.
Many observers expect that long-awaited Dodd-Frank requirements for disclosure of a CEO-to-median-worker pay ratio and TSR-versus-performance charts in proxy statements will ultimately be abandoned. Even rules related to clawback policies and hedging of company stock by executives and directors—potentially more acceptable to companies—could recede or be revised. Nevertheless, investors have made clear their strong interest in ensuring that executive pay is closely tied to long-term company strategy and performance, that top executives are not overpaid relative to what they deliver, and that pay programs do not incentivize risky behaviors that could have a detrimental, even devastating, impact on long-term shareholder value.
On the activism front, visions of excess cash flowing from promised tax repatriation and a cut in the corporate tax rate have garnered activists’ attention, but uncertainty about when and what Congress will actually enact likely means continuation of the trends seen in 2016—more targeted, tactical activism that carries the greatest chance of success.
Finally, the new administration’s dismissal of climate change as a significant risk has galvanized investor campaigns on corporate sustainability, which will be a prominent focus this proxy season.
In this light, companies should continue to reassure their owner base that good governance remains a priority, by:
Carol Bowie joined Teneo Governance as a Senior Advisor in March 2017. Prior to her retirement in July 2016, Bowie was an Executive Director at Institutional Shareholder Services (ISS), where she headed the Americas Research group that provides proxy-based research, analysis and shareholder voting recommendations for thousands of public companies in the U.S., Canada and Latin America. Preceding that role, Bowie led Compensation Research Development at ISS for several years, and previously headed the ISS Governance Institute team that produced research and insight around key issues in corporate governance and coordinated ISS’ U.S. benchmark policy development.
Directors and executives are well aware that executive compensation is heavily regulated and scrutinized. There is no shortage of legal and tax regulation impacting the design and disclosure of executive compensation. In addition, there are multiple government departments and agencies, including the IRS, SEC and DOL, as well as shareholder advisory groups and plaintiff lawyers, that carefully review executive compensation packages for compliance with the applicable laws and policies.
The regulation of executive compensation, however, will change in the near future. Both President Trump and members of Congress have stated that they favor the repeal or modification of many of the laws covering executive compensation. The targets for deregulation or modification are the Dodd-Frank Act, the Internal Revenue Code and the various laws that govern disclosures related to publicly-traded companies. The timing and scope of the potential deregulation or modifications to these laws, though, are uncertain.
In the meantime, companies are required to comply with the laws covering executive compensation that are in effect, including the Say on Pay requirements and related disclosures under the Dodd-Frank Act. Boards and executives are in the uneasy position of approving compensation packages under laws that may not be in effect when the compensation is paid. For example, the implementation of a deferred compensation program in 2017 may not be compliant or relevant when the compensation is scheduled for distribution if the requirements under Section 409A of the Internal Revenue Code are significantly modified in the interim.
Until the President and Congress repeal or modify the laws covering executive compensation, boards and executives must comply with the current legal requirements. The potential liability for companies and the risk of enforcement actions or lawsuits are too great for boards and executives to take action now in anticipation of change in the regulation of executive compensation.
Craig Tanner is an attorney with Reed Smith LLP, a global law firm. Through his executive compensation and equity incentive practices, Tanner works with his clients to design and execute effective compensation programs. Tanner works with compensation committees, management and individual officers on designing and structuring compensation alternatives for all phases of the company’s life cycle—from start-up to public. The compensation tools typically include stock awards, derivatives, performance-based pay, deferrals, retention programs, transaction incentives and severance plans.
Both Brexit in the U.K. and the election of Donald Trump in the U.S. are reflections of the populist vote coming to bear. I would classify them as disrupters across the geopolitical, regulatory and macroeconomic realm. Whenever there are disrupters, you need to think about addressing them constructively and effectively, and being nimble in your environment, regardless of the regulatory backdrop. We’re aware that changes in the U.S. administration could affect corporate governance outcomes, for example, by reversing or replacing financial regulations already implemented by Dodd-Frank. In this environment, the relational engagement model that investors have built with portfolio companies over the last six to eight years, particularly at the senior management and board of director level, will become increasingly important.
It’s an open question whether the new U.S. administration’s policies will in effect be more favorable toward corporations. The reality is that Nuveen and other institutional investors are long-term owners of companies. Our clients have entrusted us with their money and financial futures, and whether your vantage point is from the investor side or the corporate side, we should all be on the same page regardless of the administration’s stance.
The relational engagement model between boards and shareholders that we have been building long before the administration change is the balancing element to this environment of uncertainty. It has been built on trust over time with the shared goal of enhancing long-term shareholder value. Meaningful conversations will continue, whether disclosure rules are relaxed or elements of Dodd-Frank are repealed, and regardless of the administration’s approach to the SEC and beyond. Communication is the cure for uncertainty.
Bess Joffe is Head of the Stewardship and Corporate Governance team at Nuveen, the investment management arm of TIAA. She joined TIAA in 2014 to lead, shape and drive the company’s corporate governance program and policies. This includes active ownership, public advocacy, proxy voting and engagement, consistent with our commitment to best practices in corporate governance and social responsibility. Joffe is a globally recognized senior leader in the industry and well-respected as a leading voice in this field. She previously served as Vice President, Investor Relations at Goldman Sachs, where she led the company’s outreach to institutional investors on corporate governance policies and practices.