November 16, 2017

Conflict Minerals/Mine Safety Disclosure: House Committee Okays Repeal

Yesterday, the House Financial Services Committee approved 23 bills – including two pieces of legislation that would repeal Dodd-Frank’s conflict minerals & mine safety and health disclosure requirements.

H.R. 4248 would amend the Securities Exchange Act to repeal Section 13(p) – which directed the SEC to adopt its conflict minerals disclosure rules and related certification and audit requirements.  The bill would also make conforming changes to the text of Dodd-Frank.

H.R. 4289 would amend the Securities Exchange Act to repeal Section 1503 of the Dodd-Frank Act, which requires detailed disclosures about mine safety and health in the quarterly and annual reports they file with the SEC.

So, should everybody put their pens down?  This recent blog from Steve Quinlivan says that’s not necessarily a good idea:

I recommend that anyone working on conflicts minerals to continue to work. Bills passed by the Financial Services Committee have a relatively poor track record of being enacted into law, at least over the short term. Similar provisions were included in the Financial Choice Act 2.0 which has not been enacted.

Tax Reform & CEO Pay: Adding to the “Museum of Unintended Consequences?”

The GOP’s ever-evolving tax reform proposal has produced a torrent of memos from law firms, accounting firms, & other advisors (we’re posting them on  Not surprisingly, many of the memos focus on the impact of proposed changes in the treatment of executive comp. Among other things, the current version of the proposal would repeal the provisions of Section 162(m) that allow companies to deduct performance-based pay in excess of $1 million.

Congress’ willingness to tinker with executive comp reminds me of the old adage that those who don’t learn from the past are condemned to repeat it.  Remember, the much reviled Section 162(m) itself was enacted in 1993 in an effort to align executives’ interests with those of stockholders.

Instead, as former SEC Chair Chris Cox put it, Section 162(m) “deserves a place in the museum of unintended consequences.” That’s because, instead of aligning management & shareholder interests, the emphasis on performance-based pay led to something else entirely, as Prof. Steve Bainbridge explains in this blog:

Although CEO pay had been growing fast relative to other metrics during the 1980s, it was in the 1990s that CEO pay really started to explode as a percentage of corporate profits and total wages. In large measure, this occurred because of a huge shift towards options and other forms of incentive pay that were tax favored under the 1993 amendments.

How big is huge?  According to this study, in 1992, the S&P 500 granted options worth a total of $11 billion – a figure that rose to $119 billion by 2000.  Boards & comp committees undervalued equity awards. In fact, as one director quoted in this 2016 NPR podcast put it, “we thought they were free.”

Changes in accounting rules subsequently made it clear that equity awards aren’t free – but big equity awards have become part of the executive comp landscape, and this recent Stanford study says that they continue to play an outsized role in executive pay, and an even more outsized role in its explosive growth.

Now, Congress is considering eliminating the “performance-based” pay loophole.  What’s going to happen to equity awards & executive comp if this becomes law?  You’ve got me – but history says that the consequences are unlikely to be what’s intended.

Activism: CEOs In the Crosshairs

This “Forbes” interview with Skadden’s Rich Grossman discusses the implications of an increasingly popular activist tactic – targeting CEOs for removal from the board through proxy contests. Here’s an excerpt from Rich’s comments:

I think most practitioners and governance experts would agree that one of the most important responsibilities of a board is the selection of the CEO, and the removal of the CEO from the board sends a very strong message, especially a board made up of a majority of independent directors.

While shareholders do not have the right to directly remove board-selected officers, if a CEO gets removed from the board in a contest, it’s a vote of no confidence. In those circumstances, I can’t imagine a board not looking at the situation and saying, “should we rethink our decision regarding the CEO?” It certainly makes for an awkward situation.

Why are CEOs being targeted? The approach ISS takes toward proxy contests seeking minority board representation is a big part of the reason:

Under the current ISS analytical framework, recommendations are made depending on whether the dissident is seeking a minority or a majority position on the board, with the standard for a dissident seeking minority representation being significantly easier to meet than if control is sought. The ISS minority contest standard — what I’ll call the “what’s the harm” standard — for replacing directors seems to apply regardless of whether the CEO is targeted.

John Jenkins