SEC Passes New Regulations to Curb Abuses
Wednesday, December 16, 2009
The Securities Exchange Commission passed disclosure requirements in seven areas, effective February 28, 2010, to address some of the abuses that led us into the financial abyss sixteen months ago. For the most part, they are designed to remove a bit of the opacity that obscures the operations of boards.
For example, typically boards produce precisely the number of nominees required to match the number of vacant seats in an election. They provide the individual resumés, but in some cases they pack the board with cronies devoid of real qualifications. The new rules might serve as some sort of "sniff test" that would embarrass such a nominee, or at least provoke some highly creative resumé writing.
AIG collapsed, many believe, because the insurer created huge perverse incentives to take risk, under the mistaken assumption that the downside could be externalized. Alas, only the Bureau of Engraving can print money in the real world, as AIG (and the rest of us) learned to our common dismay. Now, companies must disclose such vulnerabilities. It remains to be seen whether this will truly alter pay practices within the financial sector, for example.
Last year, the House held hearings on conflicts of interest and alleged misfeasance among some of the consultants who provide advice or cover for boards that must produce compensation packages for top executives. For many firms, fees for this type of sensitive work are small in relation to much larger HR consulting and transactional tasks. Yet, for consultants, "good performance" in meeting the magic number is probably instrumental in landing the bigger jobs. The new regs will shine more sunlight on this relationship.
Predictably, the regulations have kicked up opposition in many corporate circles. Critics complain they'll generate yet more busywork, while not doing much to forestall the next crisis. Whatever the merits of this argument, a reading of the disclosure objectives (below ) suggests that conscientious boards would have done all this on their own, to preclude the intrusion of the SEC.
For example, typically boards produce precisely the number of nominees required to match the number of vacant seats in an election. They provide the individual resumés, but in some cases they pack the board with cronies devoid of real qualifications. The new rules might serve as some sort of "sniff test" that would embarrass such a nominee, or at least provoke some highly creative resumé writing.
AIG collapsed, many believe, because the insurer created huge perverse incentives to take risk, under the mistaken assumption that the downside could be externalized. Alas, only the Bureau of Engraving can print money in the real world, as AIG (and the rest of us) learned to our common dismay. Now, companies must disclose such vulnerabilities. It remains to be seen whether this will truly alter pay practices within the financial sector, for example.
Last year, the House held hearings on conflicts of interest and alleged misfeasance among some of the consultants who provide advice or cover for boards that must produce compensation packages for top executives. For many firms, fees for this type of sensitive work are small in relation to much larger HR consulting and transactional tasks. Yet, for consultants, "good performance" in meeting the magic number is probably instrumental in landing the bigger jobs. The new regs will shine more sunlight on this relationship.
Predictably, the regulations have kicked up opposition in many corporate circles. Critics complain they'll generate yet more busywork, while not doing much to forestall the next crisis. Whatever the merits of this argument, a reading of the disclosure objectives (below ) suggests that conscientious boards would have done all this on their own, to preclude the intrusion of the SEC.
- The relationship of a company's compensation policies and practices to risk management.
- The background and qualifications of directors and nominees.
- Legal actions involving a company's executive officers, directors and nominees.
- The consideration of diversity in the process by which candidates for director are considered for nomination.
- Board leadership structure and the board's role in risk oversight.
- Stock and option awards to company executives and directors.
- Potential conflicts of interests of compensation consultants.
