The SEC, Corporate Governance and Executive Compensation (Part 1)

The staff of the Commission has been working hard at improving compliance with the new executive compensation disclosure requirements adopted last year, so reports the WSJ.  It seems that companies that disclose the amount of compensation is related to individual performance, but then lack adequate disclosure on how individual performance translates into the actual amounts paid. 

This process illustrates the limits of SEC enforcement.  Violations of these requirements amount to a violation of Section 13(a) of the Exchange Act (the provision requiring periodic reports).  There is no private right of action for violations of the Section.  See Lamb v. Phillip Morris, 915 F.2d 1024 (6th Cir.), cert denied, 498 US 1086 (1991).  As a result, the only way to ensure compliance is through SEC jawboning and enforcement.  It is inevitable that the Commission will tire of the use of staff resources in attempting to influence disclosure in this area.  The same thing occurred in connection with efforts to improve disclosure in management's discussion and analysis back in the 1990s.  The Commission conducted studies, issued releases, and in the Caterpillar case, brought the first MD&A case that did not also involve fraud.  But, frankly, when is the last time MD&A has surfaced on the Commission's radar, either through comments by CorpFin or a case brought by Enforcement?  Companies know that they must ride out the scrutiny but that ultimately it will fade.  This effort shows the limits of SEC enforcement (contrary to those who supporting the Stoneridge decision who think that the Commission is an adequate substitute for a private right of action).