Citizen-led initiatives scored big wins in the midterms. But now this form of direct democracy is under attack.
Overpaid CEOs enjoyed a sweet victory in June when the House of Representatives took action to protect them from having to disclose how much more money they make than their workers.
But the celebration didn’t last long. The odds of the Senate taking similar action any time soon were always long. Now, given the health care quagmire, these odds are even longer.
And the clock is ticking. Under the regulation requiring this CEO-worker pay ratio disclosure, large publicly held corporations are due to start reporting their numbers in 2018.
What about non-legislative action? The regulation, which arose out of the Dodd-Frank financial reform law, certainly has plenty of enemies outside the halls of Congress.
One of the most ardent is SEC Commissioner Michael Piwowar, who gets downright apoplectic when speaking about the horrendous burden this “useless” and “special interest-motivated” regulation imposes on corporations — corporations that apparently don’t have the foggiest idea how much they pay their own workers (publicly held firms already report the CEO side of the ratio equation).
When asked about the issue at a July 17 Heritage Foundation event broadcast on C-Span, Piwowar said “first best” would be Congressional repeal — in fact, he exclaimed, that would be “fantastic!” But in this interview and in a speech a few weeks earlier to the Society on Corporate Governance, Piwowar suggested that regulatory actions to delay or water down the regulation might also be possible, depending on how the public weighs in on the question of costs and benefits.
The regulation to require corporations to disclose the gap between CEO and worker pay is 'useless,' 'special interest motivated,' and 'burdensome.'
SEC Commissioner Michael Piwowar, Heritage Foundation event televised by C-Span, July 17, 2017.
What Piwowar failed to mention is that the jury came in on that question years ago. Before the SEC finalized the regulation in 2015, the agency received more than 287,400 public comment letters, the vast majority of which were strongly in favor of the rule. Supporters included four state officials responsible for their state pension funds, more than two dozen institutional investors and investment managers, including CalPERS (manager of the largest U.S. pension fund), Trillium, Domini, and Walden Asset Management, as well as the Council of Institutional Investors. They all made the general argument that extreme pay gaps are both unfair and bad for business.
But Piwowar is not one to be dissuaded by such a deluge. This past February, he used his authority as the SEC’s acting chair to “re-open” public comment on pay ratio disclosure. Specifically, he asked for “input on any unexpected challenges” that corporations have experienced in calculating their ratio and “whether relief is needed.”
Piwowar got comments aplenty — just not the kind he was looking for. Even as the country was experiencing a period of political “shock and awe” in the first days of the Trump administration, more than 14,240 individuals and organizations still took time to submit letters on what should be a straightforward transparency issue. According to the legal news site JD Supra, only 30 of these letters expressed opposition to the regulation. Even fewer bothered to try to cite any “unexpected challenges” with compliance.
And so Piwowar’s dogged hunt for ammunition continues. Even though his initial public comment deadline passed months ago, he said in his recent conference remarks that he’d continue to welcome submissions about how difficult it is to calculate median worker pay. And at the Heritage Foundation, he tossed out the possibility of using this information to justify the use of “exemptive authority” to narrow the scope of the regulation (small firms are already exempted).
He and other defenders of overpaid CEOs have reason for angst. A recent Washington Post article pointed out that even if Piwowar decides to push for an SEC vote to delay the rule, he might have to wait until at least one of the two current vacancies on the Commission is filled. Three Commissioners are needed for a quorum and the current Democratic appointee could scuttle votes by merely not showing up. President Trump did submit an SEC nomination recently, but it needs to be confirmed by the Senate and well, you know, quagmire.
In the meantime, there are growing signs that the pay ratio train has left the station. Even Wall Street Journal columnist Stephen Wilmot has weighed in favorably, suggesting the information might be useful in flagging investment risks such as those that led to the 2008 financial crisis.
Perhaps out of desperation, the U.S. Chamber of Commerce is trying out new and different arguments against the regulation, beyond the usual “burdensome” line. In July 18 testimony before a subcommittee of the House Committee on Financial Services, Thomas Quaadman, a Chamber Executive Vice President, railed against a new policy in Portland, Oregon to apply a small surtax on corporations that pay their CEOs more than 100 times their median worker pay. Lawmakers in five states are considering similar bills.
“These taxes are a development that was never considered by Congress or the SEC when Dodd-Frank was passed,” Quaadman noted. And this, he claimed, justified “the Chamber’s longstanding position that the pay ratio rule was never about providing material information to investors.”
Following this perverse logic, the SEC should be prohibited from requiring disclosure of any information that may some day in the future be used for purposes other than investor analysis.
As the anti-disclosure zealots continue their struggle, most executive compensation consultants and legal experts are operating under the assumption that pay ratio disclosure will live to see the light of day.
David Wise, a senior client partner at Korn Ferry Hay Group, told Washington Post reporter Jena McGregor that back in January he thought repeal was a “no brainer,” but now, “the betting man in me says this will be in place next year, only because of the traffic in the queue. You’ve got some big, big trucks in front of you.”
In other words, it’s time for the corporations that have resisted this transparency reform to pull out their calculators.