Comments In, ‘Couric Rule’ Plods Forward

With the comment period now closed on the last portion of the Securities and Exchange Commission’s rule on disclosure of executive compensation—a controversial idea to require public companies to disclose the pay of some top non-executive employees—Corporate America is waiting to see whether the SEC will forge ahead, revise the plan, or act on suggestions to scrap the whole thing.

Dicker

“I believe that there are strong reasons why the proposal should not be adopted in its current form, but it’s anyone’s guess what the SEC will do eventually,” says Howard Dicker, partner at the law firm Weil Gotshal & Manges. “If the proposal (or some form of it) is adopted, it is quite possible that the provision will be not be effective for the upcoming proxy season of calendar year-end companies.”

In August, while the SEC released a final version of most of its compensation-disclosure reforms, it re-proposed what has been dubbed the “Katie Couric Rule.” In its original form, the Couric Rule would have required companies to disclose the total compensation and job description of their three highest-paid non-executive employees who earn more than the company’s named executive officers.

Corporations bitterly contested the Couric Rule, so named because it would require disclosure of pay packages for the likes of celebrity journalist Katie Couric, along with professional athletes, entertainers, and other top earners who often play no role in corporate governance. Rather than kill the provision entirely, however, the SEC decided to re-propose a narrower version of the rule that targets only non-executive employees with management responsibilities.

The revamped proposal eliminated some concerns that the rule was overly broad by restricting its application to key policymakers. It would exclude employees without responsibility for significant policy decisions within the company or at some significant subsidiary business unit or function. For example, the SEC noted that actors, professional athletes, and top salesmen would be exempt from the disclosure as long as they don’t have any responsibility for significant policy decisions.

Cos. Voice Concern Over Revised Proposal

Like the original rule, however, the revised proposal has met with opposition from much of the business community. One notable voice of opposition was a letter signed by the chief legal officers at Agilent Technologies, BellSouth Corp., Constellation Energy Group, Dow Chemical Co., Eli Lilly, Exxon Mobil, General Electric, General Mills, Intel, Kimberly-Clark, PPG Industries, Texas Instruments, United Technologies, and Viacom. The group wrote that the additional disclosure “would not be material to investors, would create inconsistent disclosure practices among public companies and could place registrants at a competitive disadvantage in the market for managerial talent.”

The group also argued that since the pay of non-executive employees is often determined through “a process distinct from that which applies to executive officers,” where pay is set by the board or the compensation committee, information about non-executive employees will not help investors improve their understanding of a company’s decision-making process or help them evaluate a board’s effectiveness.

Several other corporate executives and attorneys, the U.S. Chamber of Commerce, the Business Roundtable, the HR Policy Association, and the Investment Company Institute also opposed the measure, which drew more than 40 comments upon re-proposal. Most raised the same complaints as the collection of chief legal officers. Michael Jones, general counsel at Markel Corp., for example, said the proposed requirements “confuse information that might be interesting or even newsworthy with what is material to investors.”

Comments

An excerpt from recent comments on the “Couric Rule” re-proposal from various companies follows.

The Commission has indicated that it is considering, among other things, limiting

disclosure to those employees who, while not executive officers, have responsibility for

significant policy decisions within the company, a significant subsidiary of the company or a principal business unit, division or function of the company. While we agree with the Commission’s suggestion that the proposed supplemental disclosure should not apply to a registrant’s “talent”, we are concerned that requiring the supplemental disclosure for employees who have a “significant policy influence” at a subsidiary, business unit or division would lead to inconsistent disclosure practice among public companies. Companies and their boards of directors currently make periodic determinations of which officers and employees have sufficient policy making functions for the registrant to meet the definition of “executive officer” set forth in Rule 3b-7; the standard of Rule 3b-7 has proved workable and, we believe, has over time

come to be applied on a reasonably consistent basis. Boards of directors, however, are less likely

to be familiar with the day-to-day operations and decision-making processes of subsidiaries and

individual business units or divisions than with those of the registrant. Moreover, different

companies structure decision making below the executive officer level in different ways, making it difficult to formulate a uniform “bright line test” for determining who exercises significant

policy functions at the subsidiary or business unit level. In view of these difficulties, we are not confident that uniform practice can be expected from a standard that looks to significant policy making functions within a subsidiary, business unit or division.

Source

Comment Letter To SEC On “Couric Rule” Re-Proposal From Agilent Technologies, et. al (Oct. 20, 2006)

Similarly, Richard Alpern, a principal at compensation consulting firm Frederic W. Cook & Co., noted that, except in limited circumstances, such as equity awards, the compensation of non-executive employees wouldn’t be reviewed by most the compensation committees and “thus would be outside of the governance practices that are of interest to investors.”

Critics also say the requirement would lead to inconsistent disclosure practices by public companies. In their letter, the group of corporate legal executives noted that boards are less likely to understand day-to-day operations and decision-making processes of subsidiaries and individual business units or divisions, and that companies structure decision making below the executive officer level in different ways. That, they wrote, “would make it difficult to formulate a uniform ‘bright line test’ for determining who exercises significant policy functions at the subsidiary or business unit level.”

If the SEC does require disclosure of the compensation for non-executive employees, the legal officers said ideally registrants should not be required to identify the additional employees by name to mitigate the risk of talent raids by rivals.

Others suggested that if the SEC does move forward with some version of the Couric Rule, it should make the proposal effective for the 2008 proxy season. (The rest of the SEC’s compensation disclosure reforms will be effective for 2007.) An extra year’s time for the Couric Rule, Alpern wrote, “would recognize the already heavy burdens of time, data collection and costs imposed on companies in complying with the new requirements for proxy disclosure of executive and director compensation.”

Many Uncertain About How SEC Will Act

What the SEC will do now is anyone’s guess. A spokesman for the agency told Compliance Week that “no date or timetable has been set for further action on the reproposal.”

Bell

Former SEC attorney Julie Bell, now counsel at the law firm Hogan & Hartson, says companies are likely to have a difficult time amending their disclosure controls and procedures should the Couric Rule go into effect. While the rule was proposed in January and again in August, she says, “Companies have not necessarily been required to track this information before, and it would be difficult to impose this requirement without giving them the ability to make such revisions.”

“The bottom line is that many [companies] are not clear on where this proposal came from initially, are uncertain of the purpose or need for it, and would probably like to see it go away,” Bell adds.

Marc Folladori, a partner at the law firm Mayer, Brown, Rowe & Maw, hopes the SEC will abandon the idea entirely, or at least “postpone it for a while and put it out for re-proposal later.”

Folladori

Folladori, who originally considered the Couric Rule “almost a red herring” when the SEC first issued it in January, says the new version “doesn’t afford boards or practitioners very good guidance” about how to define and identify employees with responsibility for significant policy decisions.

He contends that the SEC’s proposed definition “appears to conflict a little bit” with language in Rule 3(b)7 of the Securities Exchange Act that defines an executive officer; other commenters raised the same point in their writings to the Commission.

“The bigger question is, how relevant is this?” Folladori says. “The disclosures and proxy statements try to provide information to shareholders as to what kind of job the directors they elect every year are doing. Nine out of 10 times the board and the compensation committee don’t get into the weeds much or make any decisions about employees’ compensation. So this is fairly irrelevant.”