Speech by SEC Chairman:
Chairman's Opening Statement; Proposed
Revisions to the Executive Compensation and Related Party Disclosure Rules
by
Chairman Christopher Cox
U.S. Securities and Exchange Commission
Washington, DC
January 17, 2006
Good morning. This is a meeting of the SEC under the Government in
Sunshine Act on January 17, 2006. Today we address a subject that's gotten
a considerable amount of recent attention: executive compensation.
Specifically, we're addressing the set of rules that govern a public
company's disclosure of how it compensates its directors and highest paid
executive officers.
This proposal is the work of the Division of Corporation Finance. I
want to thank the Division's staff for the hard work they have put into
this.
And I particularly want to recognize an individual who has done more to
improve the quality of corporate disclosure in America during the past
four years than any living person -- our Corporation Finance Division
Director, Alan Beller.
As all of you know, Alan is leaving the Commission next month and
returning to the private sector. In fact, this is his last scheduled open
meeting. Investors can be enormously thankful for the time he has spent
here.
Even before Sarbanes-Oxley, there was Alan Beller. He came to
Washington in early 2002, just as Enron was sapping investor confidence,
and right away got to work restoring trust in our capital markets.
Four years and six days ago, he commenced a non-stop period of
prodigious productivity that's seen the issuance of 70 Commission
releases, proposals, adoptions or interpretations in which he was the
driving force.
That's a new release every three weeks, for four years. Everything from
the implementation of Sarbanes-Oxley to the regulation of asset-backed
securities, to securities offering reform to, today, executive
compensation disclosure, has come from his desk.
The securities offering reform rules of last June, in particular,
modernized the way public companies communicate with investors, and
improved the flow of accurate information to the market and investors.
This is an excellent opportunity to publicly recognize Alan for his
truly impressive work, and also for the commitment he's shown to public
service.
He came here from a very successful practice, to work long hours at a
government salary, because it was a time when his country needed him. His
service to American investors and securities markets cannot be
overstated.
He's a giant in the history of the SEC, but to me and all of the
Commissioner and staff here today he is much more than that. He is a great
friend.
Alan, thank you for all you have done.
There is one more thing to say about Alan Beller's heroism. In order to
be here today to explain the Division's proposal on executive
compensation, he had to travel to Washington straight from the surgeon.
The result of that eye surgery is that he doesn't look his usual Hollywood
self for the TV cameras.
But as Mad Eye Moody has demonstrated in the latest Harry Potter film,
there's a lot you can do with one good eye. So I'm confident Mad Eye
Beller will be able to keep an eye on all of us here today.
Our purpose here today is to help investors keep an eye on how much of
their money is being paid to the top executives who work for them. Today's
open meeting marks the first time in 14 years that the Commission has
undertaken significant revisions of its rules for executive
compensation.
Simply put, our rules are out of date. It's high time we updated the
rules on executive compensation. To that end, the staff of the Division of
Corporation Finance is recommending proposed changes to the current regime
of executive and director compensation disclosure to do just that.
At same time, staff is also recommending changes in the disclosure of
related party transactions, director independence, and corporate
governance. All these are integral to our effort to provide investors and
markets with comprehensive-but also comprehensible-information regarding a
company's financial transactions with management, directors and
significant shareholders.
Over the last decade and half, the compensation packages awarded to
directors and top executives have changed substantially. Our disclosure
rules haven't kept pace with changes in the marketplace, and in some cases
disclosure obfuscates rather than illuminates the true picture of
compensation.
This has led to concern that some companies may not be disclosing all
compensation as is currently required. We have concluded that executive
compensation disclosure requirements should be modified.
We want investors to have better information, including one number-a
single bottom line figure-for total annual compensation. That single
figure will include a more accurate representation of perquisites.
Currently, companies are required to report a lump sum if an
executive's perks are more than $50,000, or 10 % of his or her salary and
bonus. And under current rules, an individual perk has to be reported only
if it represents more than 25% of all the perks that an executive
receives.
Under the proposal, perquisites must be itemized if they total $10,000
or more. The proposed new rules would also improve the disclosure of
retirement benefits. New tables would outline the defined-benefit and
defined-contribution retirement plans of top officers.
There would also be detailed descriptions of payments that could be
made if an executive is terminated. Those disclosures aren't required
under our current rules.
It's essential, however, that this proposal be understood for what it
is-an effort to improve disclosure by including all elements of
compensation. It's about wage clarity, not wage controls.
Indeed, the SEC lacks statutory authority to impose salary caps on
corporate executives and we'd be out of bounds to attempt that through
indirection.
By improving the total mix of information available to the marketplace,
we can help shareholders and compensation committees of Boards of
Directors to assess the information themselves, and reach their own
conclusions.
It is their job, not the government's, to determine how best to align
executive compensation with corporation performance, to determine the
appropriate levels of executive pay, and to decide on the metrics for
determining it.
Our job is to ensure that investors have available to them all of the
compensation information they need, presented in a clear and
understandable form that they can use.
And that means that while it is up to the Boards of Directors to decide
how much to pay the CEO, without artificial restrictions, companies will
have to disclose a clear explanation of how they arrived at both the
amount and the measurement.
The rule changes before us would require a new Compensation Discussion
and Analysis section to replace the Compensation Committee Report and
performance graph. This will provide both an obligation and an opportunity
for a company to explain its compensation policies.
The rule changes would also amend Form 8-K to focus current disclosure
of executive compensation arrangements on unquestionably or presumptively
material events.
The new rules would reorganize and consolidate the related party
disclosure rules and the rules regarding disclosure of director
independence and other corporate governance matters.
And they would for the first time require that all compensation to
board members be fully disclosed. Finally, the rules will require that all
of this specified disclosure in proxy statements, information statements
and annual reports be in plain English.
I know that some of you are thinking, "I'll believe that when I see
it." But these rule changes would permit the SEC to get very serious about
plain English.
Once again, thank you to the staff of the Division of Corporation
Finance for your hard work on this proposal, and thank you as well to the
Office of Chief Accountant, the Division of Investment Management and the
Offices of General Counsel and Economic Analysis.
I'll now recognize Alan for a more detailed description of the
proposals.
http://www.sec.gov/news/speech/spch011706cc.htm