By Michael Hiltzik
The Norman Transcript
NORMAN — Nothing seems to get U.S. corporations’ dander up like a threat to the pay and perks of their chief executives.
That’s one explanation for corporate America’s superheated, turbocharged, over-the-top reaction to the CEO pay ratio rule recently proposed by the Securities and Exchange Commission.
The rule requires most large public companies to calculate the ratio of the pay of their chief executive to the median pay of all their employees. Its general terms were mandated by the Dodd-Frank Act, which imposed numerous regulatory changes on corporate and banking behavior in the wake of the 2008 financial meltdown.
Congress, however, asked the SEC to figure out how to put it into practice. The SEC voted in September to open its proposed version to comments from supporters and opponents for 60 days. Whatever it finally approves won‚Äôt go into effect until 2015.
Wall Street, big banks and corporate lobbying groups have mustered their troops to fight the most important Dodd-Frank provisions. But the opposition to the CEO rule has a different flavor entirely. It’s not unusual for the business community to claim that a new regulation will spell the end of industry. In this case, they’re arguing it will threaten the SEC.
It’s not hard to see why. Unlike most SEC regulations, the CEO rule isn’t really designed to provide information for investors. Rather, it’s designed to provide information for the larger community — for society, if you will. Its aim is to provide ammunition for the argument that the share of corporate profits going to top management, and by extension corporate shareholders, has gotten out of control.
That’s a sound argument, shared by many management experts and economists who argue that the diversion of corporate resources from workers to executives and shareholders is a major contributor to rising income inequality in the U.S., as well as to other social and economic ills.
For example, British economist Andrew Smithers observes in his new book, “The Road to Recovery,” that stock-related bonuses for executives encourage them to make decisions that boost their share prices in the short term, rather than in the long term. The harvest is that they spend corporate capital less on long-term investments, which will set their companies up for future profit, and more on shoveling dividends to investors, which props up their shares quarter by quarter.
The thrust of the business community’s attack on the CEO rule is its supposed complexity and cost. The Center on Executive Compensation, a corporate think tank, groused this summer that it’s inflexible and “unjustifiably complex.” The rule requires companies to calculate the median pay of all employees — that is, the level at which half are paid more and half less — rather than just a simple mean average, which would be easier. Other critics say it will make companies with lots of overseas workers earning Third World wages look especially bad.
Yet these fears may be unfounded. The rule under consideration by the SEC allows companies lots of flexibility in choosing how to calculate median compensation. And they would have more than a year to do so.
It may be true, as some critics say, that the rule doesn’t tell investors anything useful — or more precisely, it doesn’t tell them anything they don’t already know. The salaries of top executives already must be disclosed annually; it doesn’t take an advanced computer algorithm for investors in, say, JPMorgan Chase to know that Chairman and CEO Jamie Dimon is compensated immensely well ($62.6 million over the last three years).
But it doesn’t follow that serving investors should be the limit of the SEC’s mandate. Congress thinks that corporate disclosures also can serve a social purpose. Why saddle the SEC with the job of overseeing these rules? It’s because the SEC is the only agency with the legal power to mandate corporate disclosures; Congress is simply putting this preexisting authority to use. Nor is this the first time that’s happened. As far back as the 1970s, the SEC was ordered to force companies to make environmental disclosures.
But that may be what irks Big Business the most about the CEO pay ratio rule. As Meredith Cross, a corporate lawyer who has walked through the revolving door between the SEC and business world at least four times in her career (two stints at the agency’s division of corporate finance, two at the law firm WilmerHale), observed in a recent speech, “requiring companies to post potentially embarrassing information ... can be a very powerful motivator to change corporate behavior. ... There is a significant risk that people will keep pushing for it.”
Mary Jo White, the new SEC chair, is also uneasy about “social” disclosures. In a speech this month, she acknowledged concerns that the SEC‚Äôs independence could be compromised “by those who seek to effectuate social policy or political change through the SEC‚Äôs powers of mandatory disclosure.” Those concerns about social agendas, she said, “resonate with me.”
But she did vote with the 3-2 majority in September to open the CEO pay rule to public comment.
What corporate managements may not want to admit is that the CEO pay rule may help investors after all. Just as investors have a legitimate interest in whether their companies are big polluters, there’s reason to think the ratio of CEO pay to average compensation really is meaningful, as Drucker perceived.