TheCorporateCounsel.net

We have posted the transcript for our webcast “The Latest: Your Upcoming Proxy Disclosures.” Mark Borges of Compensia and CompensationStandards.com, Alan Dye of Hogan Lovells LLP and Section16.net, Ron Mueller of Gibson Dunn & Crutcher LLP and yours truly discussed the latest guidance on how to improve your executive and director pay disclosure to improve voting outcomes and protect your board, as well as how to handle the most difficult issues on oversight, engagement and disclosure of executive and director pay.

On the topic of the SEC’s potential agenda for executive compensation disclosure and related matters, Mark Borges noted:

While it’s still too early to tell whether the incoming SEC Chair has these or any other compensation disclosure requirements on his immediate agenda, of the three, I think the one most at risk is pay ratio. Even there, I wouldn’t quantify that as high risk. As Dave said, each of those rules was Congressionally mandated, so it’s unlikely that the SEC, of its own initiative, would try to get rid of them or substantially change them. But for pay ratio, people may be performing a cost-benefit analysis and asking whether or not that information is really helpful.

When it was adopted, the SEC believed that this information would provide shareholders with a company-specific metric that would assist them in evaluating executive compensation practices, but seven years later, now that the initial sticker shock has worn off, it’s not clear that the disclosure is serving its intended purpose. For the most part, I think many companies view it as a compliance exercise that requires a fair amount of work once every three years. As far as I can tell, to date, ISS and Glass Lewis, while they provide the pay ratio information as a data point in their reports, don’t really consider it in making their voting recommendations.

Given the reaction to this disclosure in the legal community and in the corporate community, I could envision an effort developing to rescind the disclosure, as I said, on a cost-benefit basis. It’s a lot of work, it costs a lot of money when you have to identify a new median employee, and nobody seems to be using the disclosure, at least at this stage, to evaluate financial and compensation information in any way differently than they could before it was required.

I’m less concerned about the other two rules, pay versus performance and the clawback rule. I don’t think there’s going to be much of an effort at this stage to revisit those rules, at least in 2025. Even though pay-for-performance is a lot of work, and it’s still a bit unclear how investors can best use this information, given that we’re coming up upon the proxy season where, for the first time, companies will be required to reflect a full five years’ worth of information, which was always the rule’s intent, I think it’s going to take a couple more years for the investor community to thoroughly assess this disclosure and determine its usefulness. While this is something to keep an eye on, I don’t think it’s one of the things that’s at the top of the list that needs to be or will be considered for change.

As for the clawback rule, we’re just beginning to see the scope and implications of the compensation recovery process this year, at least with a couple dozen companies, and we’re starting to learn how investors are going to react to the information that’s now available to them. I think it’s going to take a little bit longer, maybe a couple of years there as well, to get a real sense of what stakeholders think about this rule and whether they think that there are things that could be changed. Also, I think the optics of rescinding the rule would be a public relations nightmare. And I doubt that we’re going to see Congress direct the SEC to undo the rule. Yet I could still see some tinkering with the mechanics, depending upon what we learn over the next couple of years when we get into some more complex situations and more companies clawback compensation.

In other areas, DEI is an important one that continues to be a subject of debate. I think the controversy over DEI and disclosure is almost certain to continue. Therefore, it’s too speculative to say what might happen in the disclosure area at this stage. Notwithstanding the publicity of high-profile companies reevaluating their DEI initiatives, there are still a lot of companies that are continuing to integrate these principles in their businesses. I don’t think it’s going to affect disclosure right away, absent some sweeping legislative, judicial or regulatory development.

I also think companies are going to continue to incorporate DEI metrics into their incentive compensation programs with, as we’ve seen in the past, a continuing emphasis on their short-term incentive plans. We’re likely to see a continuing evolution in how companies design and utilize these metrics for now, but the litigation targeting DEI programs is a key factor shaping what happens going forward, particularly this year and next. It remains to be seen how this is going to play out.

In terms of human capital management, as you probably know from the Reg-Flex Agenda, the SEC pushed back the completion of that project until October of 2025. While it’s still there, it wouldn’t surprise me to see that project further stalled or actually set aside.

One that might come back, though, that we haven’t thought about for a while, is the SEC’s proposal from 2020 to revise Rule 701 and Form S-8 regarding equity awards granted to platform workers. As you may recall, back when that proposal was first published, the SEC was considering allowing companies to more easily grant equity awards pursuant to a Form S-8, or in the case of a private company, pursuant to Rule 701, to workers who were providing bona fide services through a company’s technology-based marketplace platform or system. Given the developing relationship between the new administration and the tech community, I could see this proposal being reactivated or renewed.

Members of this site can access the transcript of this program. If you are not a member, email sales@ccrcorp.com to sign up today and get access to the full transcript – or sign up online.

– Dave Lynn