Another number investors can’t trust

By Dominic Jones

NO ONE seems happy about the new executive compensation disclosures in the United States.

Securities and Exchange Commission (SEC) chairman Christopher Cox blamed lawyers for “overlawyering” the new disclosures companies have been filing. They’re too long, he said in a recent speech, vowing that the SEC will take a harder line on the plain English requirements in the coming year.

The lawyers didn’t take that well. Broc Romanek at CorporateCounsel.net noted in a recent post that a bunch of lawyers emailed him to protest their innocence, saying compensation reports are long because the SEC’s rules make them that way.

They also blamed human resources departments for trying to “put boilerplate in the proxy statement.” The lawyers took credit for trying to make the reports more readable.

I can certainly attest to the fact that “boilerplate” and academic-level writing is a problem with many early CD&As.

SEC’s unusual tinkering leads to unusual results

Meanwhile, the SEC is taking heat from the media. Bloomberg columnist Graef Crystal says the new laws have turned executive pay into hieroglyphics and achieved the opposite of what was intended. Due to how bonuses are being reported, companies can now under-report executive pay, he says.

Crystal also found in a review of 43 proxy statements that the SEC’s controversial 11th-hour changes to options reporting requirements had actually not helped companies. Instead, it resulted in options amounts in summary compensation tables being 6% higher on average than they would have been under the original proposal.

At the weekend, Gretchen Morgenson of the New York Times also pointed out how the SEC’s last-minute change to the options reporting formula had led to unusual results. She highlighted the case where the CEO of Brookfield Homes took away almost $8 million last year, but the company reported a negative $2.3 million in its proxy statement because the CEO’s options from 2006 and prior years fell in value.

Fix “the number” first

Clearly, there’s some unhappiness with the outcome of the SEC’s new rules. Executive pay reporting is too complex and gives out some unusual results that don’t tell the whole story. Investors’ hopes for a single reliable total pay number seem to have gone up in smoke.

If there is a solution to skewed numbers being reported, then the SEC needs to do that first and worry about plain English later. It’s no use complaining about a lack of plain English if the underlying facts misrepresent the true picture.

Whether plainly spoken or highfalutin, a wrong number is a wrong number.

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