It’s been quite a month for the defender of investors and capital markets. In May, the Securities and Exchange Commission (SEC) has managed to take three actions which, collectively, ran against the wishes of all of the SEC commissioners—except SEC Chair Mary Jo White.
Last week, the SEC reaffirmed that crime can pay when it issued waivers to five mega-banks in a wrongheaded move vehemently opposed by SEC Commissioner Kara Stein. Commissioners Daniel Gallagher and Michael Piwowar objected to a proposed rule that companies compare changes in executive compensation to a measure called total shareholder return. And more recently, the regulator put off implementing a rule to disclose the ratio between worker and CEO pay, against the wishes of Commissioner Luis Aguilar, who wanted companies to voluntarily disclose those figures two years ago.
Big bank wrongdoing? Let's go easy
Big banks pled guilty last week to what Stein called “criminal conspiracy to manipulate exchange rates.” Stein disagreed with the waivers the SEC granted to Citigroup, JPMorgan, UBS, Barclays, and the Royal Bank of Scotland. Those waivers allow the banks to continue to do business they otherwise would have had to exit because of their wrongdoing.
Stein wrote about the banking giants’ “recidivism and repeated criminal misconduct” and the SEC’s response to such behavior. “The Commission granted at least 23 WKSI [well known seasoned issuer] waivers to these five institutions in the past nine years. The number climbs higher if you include Bad Actor and other waivers," Stein wrote. “Allowing these institutions to continue business as usual, after multiple and serious regulatory and criminal violations, poses risks to investors and the American public that are being ignored.”
Clearly, the SEC, which is a law enforcement agency, has made no progress on this issue since 2010, when I wrote about how the regulator looked the other way as Goldman engaged in crisis-era behavior, the kind the investment-banking firm had pledged never to repeat.
Pay incentives that fuel crisis? Let’s encourage 'em
I admit I found it unusual to be on the same side as Gallagher and Piwowar when they opposed the SEC's proposed implementation of a Dodd-Frank rule that executive pay be measured against a company's total shareholder returns. But I stand with them, wishing the SEC had held its fire until it could shoot straight.
The American Bar Association and the Center on Executive Compensation, among others, have opposed the SEC's prescriptive approach to this rule. In choosing total shareholder return (a measure of a company's stock market price and dividends), the SEC admits that pay disclosure may have nothing to do with the actual way in which a corporate board makes compensation decisions. The problem is that this kind of measure may now have an influence on such decisions.
Boards should not reward executives based on stock performance or dividends paid. They should reward executives based on the operational measures the executives in that company should be focusing on and can control. As a basis for incentives, a company's stock price promotes undesirable CEO behavior, the kind that can lead to volatile swings in the economy. Those incentives helped fuel both the financial crisis and the stock market rout following the misdeeds of Enron and WorldCom’s top executives. Similarly, increasing dividends is not always wise, because they can strip a firm of the assets needed to make valuable long-term investments and the liquidity required to weather rocky times.
The SEC should have required that companies report on the financial performance measures they currently use to determine compensation. Then, investors could sort out which companies actually understand performance measurement and which ones are clueless.
Risky compensation? No one needs to know
According to a government notice, the SEC will not be issuing the anticipated CEO-to-worker pay ratio rule until next year. The SEC received public comments on the proposed rule in 2013, and Luis Aguilar had argued that companies should voluntarily disclose this information because high pay differentials can create long-term risks for companies. But there’s no legal deadline for the rule, so the SEC is kicking this can down the road once again. A spokesperson for the SEC declined to comment on the matter.
The recent actions by the SEC are discouraging given the significant positive role that the agency could play in creating safe and vibrant capital markets. Gallagher submitted his resignation in May and Aguilar's term is up in June. Maybe next month, it will be White’s turn to be perturbed.
Eleanor Bloxham, a corporate governance and valuation authority, is CEO of The Value Alliance and Corporate Governance Alliance (http://www.thevaluealliance.com). She has been a regular contributor to Fortune since April 2010 and is the author of two books on corporate governance and valuation.