As if public companies already didn’t have enough reporting requirements the SEC is about to release new regulations governing the disclosures around executive compensation.
Over the past several years the disclosure on corporate pay policies has become refined. Proxies have contained detailed executive compensation data and have required specific compensation committee disclosure about the process used to determine bonuses for the top five executive officers.
In response to the financial meltdown and aggressive risk-taking the new rules will require that companies make a further statement regarding how pay policies could “reasonably” encourage risk-taking. Outside of the financial services industry this shouldn’t be a big deal. However, it will be interesting to see how acceptable disclosure is defined in certain high risk industries like biotechnology. For example, by definition the pursuit of new drugs based upon new science or new biological pathways is very high risk. Its the nature of the business.
I think a welcome change to the disclosure rules involve directors and their qualifications to be so. Also to be addressed is board composition and leadership structure.
As with all new disclosure requirements one has to ask what is the cost to the company and the benefit for the investor? Does this new disclosure provide essential information for an investor making an investment decision? It certainly will make interesting reading, but is it critical? In this case probably not. The upshot therefore becomes increased costs of doing business.
Although propagated by bank failures the new disclosure requirements are being required for all public companies. Similar to Sarbanes-Oxley before it the failure of controls in a single industry results in changes for all. Only as regulation of public companies becomes more industry specific will the system become more efficient.