Say on Pay and SEC Rulemaking (The Possibility of Private Ordering)

The SEC has put out a rule proposal designed to implement the say on pay provisions in Dodd-Frank.  See Exchange Act Release No. 63124 (Oct. 18, 2010).

During the debate over access, much of the opposition centered on the interference with private ordering.  Most (including this Blog) view private ordering as a critical and essential component of the governance process.  The problem with private ordering with respect to access was that there was no evidence, given management's control over the private ordering process, that it would occur.  In fact, as had been the case, the likely result was a categorical rule that denied shareholders access to the company's proxy statement.   See Opting Only in: Contractarians, Waiver of Liability Provisions, and the Race to the Bottom (discussing example of provision designed to result in "private ordering" but instead resulted in categorical rule that favored management). 

Say on pay will provide another opportunity to show the strengths and weaknesses of private ordering.  As the Commission noted in the release, Rule 14a-21 was only a minimum. 

• While not required, our rules “would not preclude an issuer from seeking more specific shareholder opinion through separate votes on cash compensation, golden parachute policy, severance or other aspects of compensation.” See Report of the Senate Committee on Banking, Housing, and Urban Affairs regarding The Restoring American Financial Stability Act of 2010, S. Rep. No. 111-176 at 133 (2010).

Given that say on pay is advisory, there would seem to be little harm in expanding the matters submitted to shareholders for approval.  Director compensation is another item that could be added to the list.  Once this rule is implemented, however, it remains to be seen whether the approach is in fact categorical, doing little more than what is specifically mandated by the rule.