CEO Pay And SEC Delay

Dave Johnson

Earlier this week I wrote about Executive PayWatch from the AFL-CIO. This site tracks the huge wage gap between CEO pay and the average employee. Something many people don’t know is that the Wall Street reform law was supposed to do this, but years later the regulations still have not been written! The SEC delays and delays, and then the head of the SEC leaves to take a high-paying job with a “bank consulting” firm.

The Law

Section 953(b) of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act requires public companies to disclose the median annual total compensation of all employees, the total annual compensation of the chief executive officer, and the ratio of the median employee pay to the CEO’s pay. But years later the regulations still are not written so the disclosure still does not happen.

Wall Street’s strategy is to capture regulators, delay, delay, fund Republicans, fund Republicans, and maybe it will never happen. So far this is the case.

Why The Law Is Needed

Bob Borosage explained the need for this law to take effect in March, in Mary Jo White at SEC: Watchdog or Lap Dog? The CEO Pay Test,

Needless to say, a horde of bank and corporate lobbyists mobilized to overturn the provision, and failing that, to muck up the SEC rule-making, including the big guns of the Securities Industry and Financial Markets Association, the National Association of Real Estate Investment Trusts, and the U.S. Chamber of Commerce. The regulations, promised over a year ago, are still buried in the bowels of the SEC.

This is a big deal, as testified by the millions spent on lobbying against it. CEO pay surged after 1980 when Business Week estimated it was 42 times that of the pay of factory workers. By 2010, CEOs at big companies were pocketing 343 times that of the typical worker, according to the AFL-CIO. Corporate profits are at record levels; worker pay at record lows as a percentage of the economy. The top 1 percent – made up significantly of top corporate and bank executives – captured 121 percent of the nation’s income growth in the first two years coming out of the recession. The remaining 99 percent lost ground on average.

… the information is of deep concern to investors and to customers. Legendary management guru Peter Drucker promulgated the “Drucker principle” that CEO compensation should not exceed worker pay by more than 20 to 1. If it went beyond that, Drucker argued, it destroyed morale and team spirit, particularly among middle management – with deleterious consequences for the company.

Worse, current CEO compensation packages … feature stock options and bonuses that give CEOs multimillion-dollar personal incentives to focus on short-term returns rather than the long-term growth of the company. They gut needed investments and pursue strategies to meet short-term profit expectations – shipping jobs abroad, taking on debt, selling off and plundering their own companies. They pocket their bonuses and are gone in a few years.

… investors have a deep stake and interest in this. And increasingly such companies as Whole Foods are discovering that a sensible CEO-to-worker pay package, like a commitment to the environment, helps attract customers.

The Regulatory Delay

July 2010, President Obama signs the Dodd-Frank Wall Street Reform and Consumer Protection Act.

March 2012, “two more months”: SEC finalizing Dodd-Frank CEO pay ratio rule within two months,

Under pressure from restless lawmakers awaiting action, Securities and Exchange Commission Chairwoman Mary Schapiro said her agency will implement the federally mandated CEO-to-employee pay ratio disclosure requirement “in the next couple of months.”

Today — still nothing.

Revolving Door And Captured Regulators

After delaying and delaying the regulations, the head of the SEC left to take a high-paying job with a “bank consulting” firm.

Marketwatch, April 2, SEC ex-chief Schapiro lands consulting-firm job

Less than four months after stepping down as the top U.S. securities regulator, Mary Schapiro is joining a consulting firm that has built a reputation as a shadow regulator by hiring scores of former government officials.

Promontory Financial Group LLC is expected to announce Tuesday that it has hired Ms. Schapiro, who was chairman of the Securities and Exchange Commission for nearly four years.

Promontory Financial?

Wait … where have we heard of Promontory Financial before?

Bloomberg, March, Costly Consultant Work on Foreclosures Prompts Congress Scrutiny,

U.S. lawmakers plan to summon regulators and outside consulting firms to explain shortcomings in a multi-billion dollar settlement over botched mortgage foreclosures, according to two people briefed on the plan.

Fortune, Former SEC chair Mary Schapiro’s mysterious new gig, (emphasis added, for emphasis)

On Tuesday, the bank consulting firm Promontory Financial Group announced that it had hired Mary Schapiro, who stepped down as the head of the head of SEC four months ago.
Schapiro is a particularly high-profile hire for the firm, but she’s among many there who are former Washington officials. In fact, Promontory already had a former SEC chair on its roster — Arthur Levitt is on the firm’s advisory board.

Also associated with the firm are Laura Unger from the SEC; Alan Blinder, who was a vice chairman at the Federal Reserve; Frank Zarb, who headed the Nasdaq Stock Exchange in the 1990s; and Paul Tagliabue, the former commissioner of the NFL. In all, the firm has about 400 employees, about a quarter of which are former regulators.

Promontory came under criticism late last year for leading a review of foreclosure practices at a number of the big banks. The reviews were supposed to be independent. But reports revealed that Promontory and others allowed the banks to control the process more than they should have. Ultimately, regulators determined the reviews were flawed and shut them down earlier than expected, but not before Promontory and other consultants collected $2 billion in fees.

Adding to the problem is the fact that it’s not exactly clear what Promontory does. Generally, it is one of the many firms that are helping banks navigate new Dodd-Frank regulations, though the firm has been around a lot longer than the law.

USA Today, Foreclosure review debacle lines consultants’ pockets,

The IFR debacle has thrown a spotlight on one consulting firm in particular, the Promontory Financial Group, which could serve as a poster child for the revolving door in financial regulation in Washington.

The group, which collected some $1 billion for its work in the failed IFR, was founded by Eugene Ludwig, who headed the OCC during the Clinton administration. Since it first opened its doors in 2001, it has grown to 400 employees, many of them former staffers at the regulatory agencies.

In his post, Borosage wrote about how the incoming head of the SEC is another product of the revolving door,

After serving as a public prosecutor, White made millions defending top Wall Street banks and major companies at Debevoise and Plimpton. Recent clients included JPMorgan Chase on cases arising form the financial crisis, News Corporation over its phone hacking, former Bank of America CEO Ken Lewis on the shady parts of the bank’s takeover of Merrill Lynch. Not surprisingly, Jamie Dimon, the head of JP Morgan Chase, has hailed her as the “perfect choice” to head the SEC. Exactly the kind of endorsement that should rouse the hackles of the citizens and senators alike.

If she recuses herself from any matter concerning her former clients, what is left? As a defense attorney for the big banks, she knows where the bodies are buried. Is she able and willing to use that information? Her husband has been lobbying against the Dodd-Frank regulations. Is she willing to spurn his arguments? Or is her nomination a most perverse expression of the “regulatory capture” that has rendered the SEC and other financial regulatory agencies toothless?

Answer to that last question: yes, regulatory capture that has rendered the SEC and other financial regulatory agencies toothless.

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