Speech by SEC Commissioner:
Remarks at the SEC Open Meeting
Commissioner Paul S. Atkins
U.S. Securities and Exchange Commission
July 26, 2006
Thank you, Mr. Chairman. I am pleased to support the amendments that the Division of Corporation Finance is recommending for adoption today. I particularly commend John White and the rest of the Corporation Finance staff for successfully bringing these rules to fruition within six months of their being proposed. It is fitting that this significant accomplishment is taking place at John's first open meeting.
The tremendous volume of comments received in response to our proposal is evidence that people have very strong feelings on the issue of executive compensation disclosure. Regardless of the political or social composition of the group that I meet, I almost never fail to hear comments regarding executive compensation except of course unless it is a group of CEOs. Stockholders as the owners of the corporation ought to have a window into the compensation decisions made by the boards of directors that represent their interests. Figuring out how to disclose executive compensation, however, is no easy task. Executive compensation takes many different forms, some of which are quite difficult to track and value.
The last big effort in this area took place in 1992, during my first stint at the Commission under Chairman Breeden. Now, over a decade later, it was certainly time for us to take a fresh look at our rules in this area, and Chairman Cox was correct in making this a priority. The rules that we proposed in January laid out an updated disclosure framework. By revamping the tabular approach to disclosure already in place and adding a total compensation figure, the proposed rules offered the prospect of greater clarity to investors. Unfortunately, some changes have been driven by unseemly events of the past several years, when a very few corrupt and unscrupulous companies broke the letter and spirit of the law. For example, relocation expenses are now treated as perquisites after one East-Coast-based company saw fit to count as "relocation" a Rocky Mountain retreat bought for a headquarters-based executive.
The rules that we are considering today are, I believe, even better than the ones that we proposed thanks to the many comment letters that we received and the staff's careful consideration of the suggestions contained in those letters. Some of the changes are small, such as moving the Total Compensation Column to the right in the Summary Compensation Table to conform to the standard left-to-right convention in tables. Others are technical but still important, such as requiring disclosure of only the above-market or preferential earnings, as opposed to all earnings, on deferred compensation in the Summary Compensation Table. Others came in response to investor demand, such as our decision to retain the performance graph after all.
I still am not convinced that we have gotten everything right. In some cases, the rules blur the lines between contingent and current compensation. Even with the addition of the Compensation Committee Report, I also find problematic the decision to require that the new Compensation Discussion & Analysis be filed rather than furnished. It seems inappropriate for the CEO and CFO to have to certify to the discussion of the registrant's compensation policies and decisions with respect to themselves. Time will tell how well this works.
I also recognize that these disclosures will entail significant work by registrants, particularly during the first several years. There is widespread support for enhanced disclosure, but tracking and computing all the elements of compensation for the named executive officers (and anyone else who might fall into that category) is going to be costly. I hope that registrants will find ways to track and report compensation and related party transactions that keep these costs down. I am encouraged by the fact that today's package includes some cost-saving measures, such as the reform of Form 8-K requirements for compensation arrangements.
In recent months, one form of executive compensation has received particular attention stock options. The rules that we are considering today, as you have just heard, provide for extensive disclosure about options compensation. It is important that we provide investors with complete and clear disclosure about compensation, regardless of the form that compensation takes. The Commission should not be in the business of setting executive compensation methods any more than it should be in the business of setting maximum compensation levels. These decisions are much better left to the boards of the companies in question. Our disclosure requirements are not intended to rob boards of directors of their discretion in this area; they should grant options at a time and in a manner that is consistent with their disclosures and that maximizes the interests of the existing stockholders.
Thus, in adopting clear disclosure guidance for options today, we are not telling companies to use or not to use options or to dispense them in a particular way. We are simply providing what we hope to be clear guidelines for disclosure in an area that may not have had clear enough guidelines in the past. As under existing rules, companies that deliberately mischaracterize their options practices or attempt to disguise what they are doing in order to avoid adverse tax or accounting consequences will face enforcement action.
Falsifying documents to backdate option grants is illegal. We will (and already have begun to) vigorously pursue cases in which there has been clear-cut, intentional doctoring of documents. Attempts to evade legal obligations through intentional alteration of documents or deliberate flouting of internal controls cannot be tolerated, because they strike at the core of our system of corporate governance. The enforcement staff has stated, however, that they are taking all measures to differentiate between these types of illegal activities and dating issues arising from ministerial, logistical delays. Likewise, our acting Chief Accountant, Scott Taub, has expressed concern about the "lumping together" of the innocuous with the nefarious and is working with accounting firms to ensure that this does not occur and thus to avoid some sort of mass stampede of restatements because of misplaced, excessive zeal.
Unfortunately, some commentators, some of whom are even economists, have failed to appreciate the nuances of this issue. Thus, the Commission and its staff must continue its efforts to provide perspective and rationality. Moreover, the recent focus on options should not obscure the more fundamental principle that we are affirming today which is that companies' disclosure should not drive the business decisions that boards make, but should provide stockholders with an accurate picture of why and how those decisions are made.
Now, let me turn briefly to the portion of today's recommendation that is being put out for further comment the extension of compensation disclosure to an additional layer of employees. Admittedly, this provision is narrower than the original proposal because it now applies to fewer companies (albeit still 3,500 companies) and it pulls in only employees who are both highly compensated and have a policy-making role. Nevertheless, the devil is in the interpretation of policy-making. If, as the proposal in its current form provides, an employee becomes a policy-maker through exercising "strategic, technical, editorial, creative, managerial, or similar responsibilities," then I would posit that few highly-compensated employees would not be policy-makers. Almost every job has some of these attributes. Tracking the compensation of employees who might potentially fit this bill across a large multi-national corporation with differing internal systems and managerial methods will be a costly undertaking. I also am concerned that this proposal takes us beyond the purpose of executive compensation disclosure, which is to provide better information to stockholders for purposes of evaluating the actions of the board of directors in fulfilling its responsibilities. Our existing rules already address the problem of employees who hide behind self-effacing titles yet play a policy-making role at the registrant level. In any case, I look forward to reading the comments that we receive in response to this proposal.
Finally, I would like to thank the staff who worked on this rulemaking and for producing an adopting release of this magnitude and quality in a matter of months. We also should recognize Alan Beller, John White's predecessor, who put a lot of work into this process during the first round.