Reuters
Almost everyone got on board the reform train after the 2008 financial crisis. However, big business, and in particular the biggest banks, slammed the brakes on reforms that threatened to separate senior executives from their money that critics said incentivized excessive risk taking before the crisis.
Almost all of the mandatory provisions of the law had been finalized by the Securities and Exchange Commission by the end of 2015, five years after the passage of the Dodd–Frank Wall Street Reform and Consumer Protection Act in 2010.
The executive compensation-related provisions of the Dodd-Frank Act were “designed to address shareholder rights and executive compensation practices” according to the text of the law.
But ten years after the failure of Lehman Brothers, and eight years after the passage of the reform law, 5 of 12 mandatory executive compensation rules remain to be approved by the Securities and Exchange Commission.
• A rule that requires public companies to disclose whether any employee or member of the board of directors of the issuer can use financial instruments to hedge or offset any decrease in the market value of equity securities granted was proposed in February 2015, but has not yet been finalized. A report by the Senate Committee on Banking, Housing, and Urban Affairs published in 2010 says implementation of the executive hedging rule would allow shareholders to know if executive officers are able “to effectively avoid compensation restrictions that they hold stock long-term, so that they will receive their compensation even in the case that their firm does not perform.”
• In July 2015 the SEC proposed the Dodd-Frank version of a “clawback” rule. This one takes the 2002 Sarbanes-Oxley “clawback” rule a few steps further, extending it to all executives, not just the CEO and CFO, and dropping the Sarbox requirement for misconduct before clawing back compensation. The Dodd-Frank law mandated the SEC to adopt the rule that directs stock exchanges to prohibit companies from listing their shares if they do not create and disclose a policy for clawbacks of excess incentive-based compensation for all current or former executive officers after financial statements are restated for any reason.
• A pay-versus-performance disclosure rule proposed by the SEC in April 2015 that goes hand-in-hand with the “pay ratio” disclosure rule finalized in August 2015 is also still pending. The pay-versus-performance disclosure rule is intended to give shareholders the ability to assess companies’ executive compensation relative to their financial performance. Companies would be required to provide a clear description of the relationship between executive compensation actually paid to the its most senior executives and the cumulative total shareholder return of the company. They would also disclose the relationship between the company’s TSR and that of a peer group chosen by the company over each of the registrant’s five most recently completed fiscal years.
• In July 2017, The Wall Street Journal reported that the SEC, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp. had excluded any mention of bank incentive restrictions in their updated regulatory agendas, including longer deferment periods for incentive bonuses and an extension of time payouts are subject to potential clawbacks.
The Dodd-Frank rule that would curb excessive incentive bonuses at banks is intended to prohibit a broad range of financial services firms from ever again offering any type of incentive compensation that would incentivize a financial services firm to take inappropriate risks and expose it, and taxpayers, to material financial loss.
The Financial Crisis Inquiry Commission, the bipartisan effort empowered by Congress to investigate the causes of the financial crisis, wrote in its final report, “Compensation systems – designed in an environment of cheap money, intense competition, and light regulations – too often rewarded the quick deal, the short-term gain – without proper consideration of long term consequences.”
Less than a year before the 2008 failure of Lehman Brothers sent the global economy reeling, the investment bank approved nearly $700 million in pay to 50 of its highest-paid employees, the Los Angeles Times reported in 2012, based on its review of internal documents that were exposed during the bankruptcy case.
The bank incentive compensation rule requires an agreement between the Securities and Exchange Commission, the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Depository Insurance Corp., the National Credit Union Administration and the Federal Housing Finance Agency.
Rosanna Landis Weaver, program manager for CEO pay issues at As You Sow, a non-profit foundation that promotes corporate social responsibility, told MarketWatch, “It is striking and alarming to me, that while the SEC has moved forward on many portions of Dodd Frank they have not yet addressed a key contributing factor: the way compensation plans rewarded the very actions that undermined the banks and ultimately our economy.”
The Securities Industry and Financial Markets Association, whose members include the largest broker-dealers, provided comments to all of the regulators responsible for drafting and approving the incentive compensations rules for financial institutions, saying they would have a significant negative impact on financial institutions’ ability to recruit and retain top talent.
The Business Roundtable, an association of the chief executive officers of leading U.S. companies, wrote the SEC to oppose the pay-versus-performance rules, saying they were “a poignant example of counterproductive requirements that increase the disclosure burden on companies while not providing investors with useful or accurate information.”
The SEC did adopt seven other Dodd-Frank compensation-related rules.
Four rules relate to stock exchange listing standards regarding compensation advisers and require each member of a compensation committee to be an independent member of the board of directors and describe proxy disclosure of compensation consultants and any conflicts.
The pay ratio rule requires a public company to disclose the ratio of the compensation of its chief executive officer to the median compensation of its employees. An additional rule regarding shareholder approval of executive compensation and “golden parachute” compensation arrangements was also adopted. The new rule requires say-on-pay votes at least once every three years and a “frequency” vote at least once every six years that gives shareholders a say in how often they would like to be presented with the say-on-pay vote.
Finally, another rule requires more disclosure regarding the backgrounds and qualifications of directors and director nominees and how the board is organized as well requiring faster reporting of board vote results.