A Tale of Two Cities

Recent developments on both sides of the Pond show different approaches to executive pay.  Starting with the UK, yesterday saw the announcement of a one-time banker bonus tax.  The tax is equivalent to a 50% payroll tax applied to bonuses in excess of twenty five thousand pounds (around $40,000).  In other words, banks are free to pay whatever they like and the recipients will retain the same after-tax amount, but the banks will pay a penalty for doing so.  The NY Times reports that the chief advocate of the tax, chancellor of the Exchequer Alistair Darling, has essentially conceded that the tax is, not surprisingly, a political act.  To put that in context, the current British government is in fairly desperate electoral condition, with many observers expecting the rival Tory party to regain power at the next election, absent a miracle.  In that light, punitive banker bonus taxes make short term political sense.

The US is not immune to this sentiment of course.  Following the AIG retention bonus uproar, the House passed  a bill that would have imposed a 90% tax on bonuses paid by bailed out banks.  The bill failed to go anywhere, not least because it was not supported by the White House which was and is far more popular compared to the current UK government.

Rather than confiscating bonuses, the US has gone in the direction of governance reforms great and small.  The most significant reform proposals are embedded in Senator Dodd’s financial reform bill.  These include mandatory say on pay, proxy access, majority voting and many others.  Since it was proposed a few weeks ago, nothing definitive has happened with it.  On the other hand, the House bill, sponsored by Barney Frank, has been actively debated and amended.  In fact, the course it has taken resembles nothing so much as the health care reform proposals.  In the House, the bills have been pushed and pulled at the extremes--some call for new home loan subsidies for the unemployed; others call for limiting the states’ ability to regulating banks.  Meanwhile, the Senate plods along with a more centrist approach.  As with the health care legislation, it is very difficult to handicap whether (or in what form) financial industry legislation will succeed.

Which leads us to the SEC.  The Commission itself (rather than the staff) consists of only five individuals, a majority of whom are appointed by the President’s party.  This means that a motivated SEC, unlike Congress, can usually act quite quickly to make or amend rules.   Given the amount of criticism the SEC has taken over the last two years, they would seem to have ample motivation to take bold steps.  Indeed, this past summer, the SEC seemed to be doing exactly that.  In June, they released their “proxy access” proposal, which would enable stockholders to nominate their own directors to compete against the candidates proposed by issuers.  A month later, they proposed enhancements to the disclosure requirements on executive pay, director independence, comp consultant independence, risk taking and other items.  As I noted previously, the proxy access proposal has bogged down and was taken off the 2009 calendar awhile ago.  Similarly, the disclosure proposal seemed to fall off the map.  Issuers were left wondering, in particular, whether the rules would apply to the annual proxies to be filed next spring.

Yesterday, the SEC surprised us by announcing that they would hold a (previously unscheduled) meeting next Wednesday (Dec. 16th) to considering enacting the new disclosure rules.  It is almost certain that the SEC will finalize the rules or some version of them.  But, we still have no sense of whether they will go into effect for next year.   The fate of proxy access (as well as new federal legislation) remains murky.

Stay tuned for next week’s SEC meeting to learn what new disclosures (if any) you’ll be required to make next year.