The Advisors' Blog

Yesterday on TheCorporateCounsel.net, Meredith shared a speech from SEC Chair Paul Atkins about “Revitalizing America’s Markets at 250.” One takeaway was that executive compensation disclosure reform is still very much on the Chair’s priority list – probably fitting under the umbrella of “Rationalization of Disclosure Practices” on the Reg Flex Agenda that was published a few months ago. Moreover, when they press the reset button, Chair Atkins’ speech suggests that a driving principle for any revised rules will be a focus on financial materiality.

Here’s an excerpt:

When the SEC’s disclosure regime has been hijacked to require information unmoored from materiality, investors do not benefit. In his recent and final Thanksgiving letter to shareholders, Warren Buffett highlighted a prime example of this hazard. Any summary I give cannot do justice to Mr. Buffett’s own words. So, I quote for you the following excerpt from his letter:

During my lifetime, reformers sought to embarrass CEOs by requiring the disclosure of the compensation of the boss compared to what was being paid to the average employee. Proxy statements promptly ballooned to 100-plus pages compared to 20 or less earlier.

But the good intentions didn’t work; instead they backfired. Based on the majority of my observations – the CEO of company “A” looked at his competitor at company “B” and subtly conveyed to his board that he should be worth more. Of course, he also boosted the pay of directors and was careful who he placed on the compensation committee. The new rules produced envy, not moderation.

The ratcheting took on a life of its own.

I share Mr. Buffett’s observations and concerns, which is why earlier this year, the SEC held a roundtable that brought together companies, investors, law firms, and compensation consultants to discuss the current state of the agency’s executive compensation disclosure rules and potential reforms. Somewhat to my surprise, there was universal agreement among the panelists that the length and complexity of executive compensation disclosure have limited its usefulness and insight to investors. We need a re-set of these and other SEC disclosure requirements, and this roundtable was one of the first steps to execute my goal of ensuring that materiality is the north star of the SEC’s disclosure regime.

Among other topics, Chair Atkins also reiterated his focus on disclosure accommodations for smaller and newly public companies – which may overlap with updates to executive compensation disclosure rules.

It may be too ambitious to hope for a rule proposal under the Christmas tree this year, but hey – my daughter is convinced she’ll get a unicorn. So, in the spirit of these holidays, I’m going to follow her lead and dream big. At any rate, it seems like it’ll be something to look forward to in the new year.

– Liz Dunshee