In remarks Monday before the Center for American Progress, SEC Commissioner Robert Jackson discussed his recent research on corporate stock buybacks, in the light of the substantial increase in buybacks following the 2017 Tax Cuts and Jobs Act. His focus: to call on the SEC to update its buyback rules “to limit executives from using stock buybacks to cash out from America’s companies.” If executives are so convinced that “buybacks are best for the company, its workers, and its community,” Jackson suggested, “they should put their money where their mouth is.”
Besides shock and awe, did pay-ratio disclosure have any immediate practical consequences? Well, for one, if a company did business in Portland, Oregon, the answer could well be “yes.” You might remember that, at the end of 2016, the Portland City Council, piggybacking on the pay-ratio data that most public companies were required to begin disclosing this year, adopted a measure adding a 10% surcharge to the city’s existing business tax for each company that exceeded a 100-to-1 pay ratio and a 25% surcharge if the pay ratio exceeded 250 to 1. (See this PubCo post.) According to comp consultant Equilar, the median pay ratio for the Russell 3000 was 70:1 (see this PubCo post). So what were the consequences of the Portland surtax—in Portland and beyond?
In this analysis, compensation consultant Pay Governance looks at the factors affecting pay-ratio results and, in light of the feverish media coverage that insists on comparing ratios among companies, offers advice on dealing with that onslaught of comparisons. In their analysis, the authors conclude that pay-ratio results are more affected by median employee pay than by CEO pay. And, because median employee pay can be highly variable depending on the company’s industry, geographic location, international operations and business model, pay-ratio comparisons among companies are “fraught with technical and structural issues,” and “potentially problematic,” especially between the companies with the highest and lowest pay ratios. Of course, it was never the SEC’s intent that pay-ratio data be used for comparative purposes across companies; as the SEC made plain in the adopting release, “the final pay ratio rule should be designed to allow shareholders to better understand and assess a particular registrant’s compensation practices and pay ratio disclosures rather than to facilitate a comparison of this information from one registrant to another.” That caution notwithstanding, the issue continues to confront boards and comp committees, and the authors suggest ways that boards can navigate these shoals.
As discussed in this article from the WSJ, the UK government is conducting a review of the reasons underlying the low proportion of women in top executive positions at companies in the FTSE 350 index. According to the article, the goal is to have women occupy at least one-third of board seats by 2020. However, in 2017, 24.5% of the boards seats at FTSE 350 companies were occupied by women compared with 23% in 2016 and 9.5% in 2011. But the most astonishing aspect are the atavistic quotes from a range of FTSE 350 Chairs and CEOs explaining the dearth of women in top positions.
In this report, Expanding the On-Ramp: Recommendations to Help More Companies Go and Stay Public, eight organizations—the American Securities Association, Biotechnology Innovation Organization, Equity Dealers of America, Nasdaq, National Venture Capital Association, Securities Industry and Financial Markets Association, TechNet and the U.S. Chamber of Commerce—joined forces to make recommendations about how to revitalize the IPO market and make public company status more appealing. Many of these recommendations have in the past been the subject of legislation or proposed rulemaking or have otherwise been floated in the ether but, nevertheless, have not advanced. Will the weight of these groups propel any of these recommendations forward?
With over 2,000 companies now having reported pay-ratio information for the 2018 proxy season (through May 10), consultant Equilar says it’s time to take a deep dive into the data to see what trends are discernible. Of course, until we have information for several proxy seasons, we really won’t have a very good handle on best practices or even which standards will ultimately take hold. In the meantime, however, Equilar’s analysis of the first year of reporting is a welcome beginning.
Starting in 2018, new rules required disclosure of auditor tenure in audit reports. (See this PubCo post.) And, for some companies, those tenures can stretch over a century. For example, KPMG reported that it has audited GE since 1909. (See this PubCo post.) According to this press release from the American Accounting Association, for “the first 21 companies of the Dow 30 to release their reports this year, the average auditor tenure is 66 years.” But long auditor tenure has its critics and its fans. Some argue that long tenure can adversely affect auditor independence and objectivity, while others contend that long tenure avoids the time loss and distraction of having to “onboard” new auditors, provides deep institutional knowledge—leading to higher audit quality—and offers cost savings resulting from that familiarity. However, a couple of recent academic studies call those suggested benefits into question. The press release cited above and this article in CFO.com report on new academic research that concludes that, among the Big 4 at least, the longer the tenure, the greater the fee, notwithstanding the reduction in effort required of the auditor over time. And this press release from the American Accounting Association reports on another academic study that, contrary to popular assumptions, found a positive correlation between relatively short audit tenure and the speed of discovery of financial misreporting. Will these studies renew calls for mandatory auditor rotation?