Speech by SEC Chairman:
Chairman's Opening Statement;
Proposed Revisions to the
Executive Compensation and
Related Party Disclosure Rules
Chairman Christopher Cox
U.S. Securities and Exchange Commission
January 17, 2006
Good morning. This is a meeting of the SEC under the Government in Sunshine Act on January 17, 2006. Today we address a subject that's gotten a considerable amount of recent attention: executive compensation.
Specifically, we're addressing the set of rules that govern a public company's disclosure of how it compensates its directors and highest paid executive officers.
This proposal is the work of the Division of Corporation Finance. I want to thank the Division's staff for the hard work they have put into this.
And I particularly want to recognize an individual who has done more to improve the quality of corporate disclosure in America during the past four years than any living person -- our Corporation Finance Division Director, Alan Beller.
As all of you know, Alan is leaving the Commission next month and returning to the private sector. In fact, this is his last scheduled open meeting. Investors can be enormously thankful for the time he has spent here.
Even before Sarbanes-Oxley, there was Alan Beller. He came to Washington in early 2002, just as Enron was sapping investor confidence, and right away got to work restoring trust in our capital markets.
Four years and six days ago, he commenced a non-stop period of prodigious productivity that's seen the issuance of 70 Commission releases, proposals, adoptions or interpretations in which he was the driving force.
That's a new release every three weeks, for four years. Everything from the implementation of Sarbanes-Oxley to the regulation of asset-backed securities, to securities offering reform to, today, executive compensation disclosure, has come from his desk.
The securities offering reform rules of last June, in particular, modernized the way public companies communicate with investors, and improved the flow of accurate information to the market and investors.
This is an excellent opportunity to publicly recognize Alan for his truly impressive work, and also for the commitment he's shown to public service.
He came here from a very successful practice, to work long hours at a government salary, because it was a time when his country needed him. His service to American investors and securities markets cannot be overstated.
He's a giant in the history of the SEC, but to me and all of the Commissioner and staff here today he is much more than that. He is a great friend.
Alan, thank you for all you have done.
There is one more thing to say about Alan Beller's heroism. In order to be here today to explain the Division's proposal on executive compensation, he had to travel to Washington straight from the surgeon. The result of that eye surgery is that he doesn't look his usual Hollywood self for the TV cameras.
But as Mad Eye Moody has demonstrated in the latest Harry Potter film, there's a lot you can do with one good eye. So I'm confident Mad Eye Beller will be able to keep an eye on all of us here today.
Our purpose here today is to help investors keep an eye on how much of their money is being paid to the top executives who work for them. Today's open meeting marks the first time in 14 years that the Commission has undertaken significant revisions of its rules for executive compensation.
Simply put, our rules are out of date. It's high time we updated the rules on executive compensation. To that end, the staff of the Division of Corporation Finance is recommending proposed changes to the current regime of executive and director compensation disclosure to do just that.
At same time, staff is also recommending changes in the disclosure of related party transactions, director independence, and corporate governance. All these are integral to our effort to provide investors and markets with comprehensive-but also comprehensible-information regarding a company's financial transactions with management, directors and significant shareholders.
Over the last decade and half, the compensation packages awarded to directors and top executives have changed substantially. Our disclosure rules haven't kept pace with changes in the marketplace, and in some cases disclosure obfuscates rather than illuminates the true picture of compensation.
This has led to concern that some companies may not be disclosing all compensation as is currently required. We have concluded that executive compensation disclosure requirements should be modified.
We want investors to have better information, including one number-a single bottom line figure-for total annual compensation. That single figure will include a more accurate representation of perquisites.
Currently, companies are required to report a lump sum if an executive's perks are more than $50,000, or 10 % of his or her salary and bonus. And under current rules, an individual perk has to be reported only if it represents more than 25% of all the perks that an executive receives.
Under the proposal, perquisites must be itemized if they total $10,000 or more. The proposed new rules would also improve the disclosure of retirement benefits. New tables would outline the defined-benefit and defined-contribution retirement plans of top officers.
There would also be detailed descriptions of payments that could be made if an executive is terminated. Those disclosures aren't required under our current rules.
It's essential, however, that this proposal be understood for what it is-an effort to improve disclosure by including all elements of compensation. It's about wage clarity, not wage controls.
Indeed, the SEC lacks statutory authority to impose salary caps on corporate executives and we'd be out of bounds to attempt that through indirection.
By improving the total mix of information available to the marketplace, we can help shareholders and compensation committees of Boards of Directors to assess the information themselves, and reach their own conclusions.
It is their job, not the government's, to determine how best to align executive compensation with corporation performance, to determine the appropriate levels of executive pay, and to decide on the metrics for determining it.
Our job is to ensure that investors have available to them all of the compensation information they need, presented in a clear and understandable form that they can use.
And that means that while it is up to the Boards of Directors to decide how much to pay the CEO, without artificial restrictions, companies will have to disclose a clear explanation of how they arrived at both the amount and the measurement.
The rule changes before us would require a new Compensation Discussion and Analysis section to replace the Compensation Committee Report and performance graph. This will provide both an obligation and an opportunity for a company to explain its compensation policies.
The rule changes would also amend Form 8-K to focus current disclosure of executive compensation arrangements on unquestionably or presumptively material events.
The new rules would reorganize and consolidate the related party disclosure rules and the rules regarding disclosure of director independence and other corporate governance matters.
And they would for the first time require that all compensation to board members be fully disclosed. Finally, the rules will require that all of this specified disclosure in proxy statements, information statements and annual reports be in plain English.
I know that some of you are thinking, "I'll believe that when I see it." But these rule changes would permit the SEC to get very serious about plain English.
Once again, thank you to the staff of the Division of Corporation Finance for your hard work on this proposal, and thank you as well to the Office of Chief Accountant, the Division of Investment Management and the Offices of General Counsel and Economic Analysis.
I'll now recognize Alan for a more detailed description of the proposals.