The SEC: Beyond Disclosure

Forbes.com
By Luician Bebchuk
January 19, 2006

Tuesday’s Securities and Exchange Commission vote in favor of expanded disclosure of executive pay arrangements is a necessary and very useful step. But we should harbor no illusion that it would be sufficient by itself to fix the problems of U.S. executive compensation.

Reforming the disclosure of executive compensation is necessary because companies have for too long taken advantage of "holes" in existing disclosure regulations to "camouflage" large amounts of performance-insensitive compensation. Firms should not be permitted to fail to provide investors with a complete, accurate and transparent picture of pay packages.

But while improved disclosure is necessary, it is also insufficient. In explaining the rationale for improving disclosure of pay arrangements, SEC Chairman Christopher Cox stressed that "the market for executive talent is no different" from other markets and, like other markets, will perform better with more information. The problem, however, is that the market for executive talent has been operating quite differently from other markets.

Executives' pay is not set by companies' owners, but rather by companies' boards. Insulated from shareholders by existing legal arrangements, boards have not been setting pay arrangements solely with shareholder interests in mind. Indeed, notwithstanding the limitations of current disclosure requirements, some significant flaws of existing pay arrangements have been evident for some time. Given investors' limited power, however, these flaws have persisted...