Update on the current board issues: October 2013

Issues in brief


What should boards do now that CEO pay ratio disclosure rules are proposed?

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Now that the SEC has proposed the CEO pay ratio disclosure rules mandated by the Dodd-Frank Act, public companies and their boards should determine next steps.

The SEC has proposed rules that would require public companies to disclose the median of the annual total compensation of all employees, the annual total compensation of the CEO and the ratio of these two amounts.

The proposed disclosure would be required in any annual report, proxy or information statement or registration statement that requires executive compensation disclosures. The proposed disclosure requirements would not apply to emerging growth companies, smaller reporting companies or foreign private issuers. The public comment period ends December 2, 2013 and if the rules become effective in 2014, companies with a fiscal year ending December 31 would be first required to include the disclosures relating to fiscal year 2015 in their 2016 annual meeting proxy materials.

"Given the relative burden of complying with the rules and getting the calculations right, especially with the intense stakeholder interest in the pay ratios, companies should begin planning now for the disclosure," said Steven Slutsky, a principal in PwC’s Human Resource Services practice.

He pointed out that the main challenges with meeting the proposed disclosure requirements are determining the annual compensation of the median employee, the costs involved in doing so, and testing whether existing human resource systems can properly collect the necessary information. In the proposed rules, the SEC gives companies flexibility as to what methodology they can use to determine to identify the median employee and calculate the annual total compensation. Slutsky expects that most large, complex companies, or ones with substantial international employee populations, will determine that statistical sampling is the most efficient method for calculating the median compensation.

Some suggested company actions from the webcast are:

  • Start to review information systems to determine if and/or how the information for the calculation can be obtained
  • Identify and implement changes necessary to gather the information properly
  • Determine if statistical sampling will be used and, if so, what method makes sense.

[To learn more about the CEO pay ratio disclosure rules, watch the PwC Human Resource Services practice October 3 webcast.]


More S&P 500 companies disclosing political spending

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In 2013, more S&P 500 companies provided disclosure about their political spending policies and practices than in 2012, according to the 2013 CPA-Zicklin Index of Corporate Political Accountability and Disclosure. The index is a joint effort by the Center for Political Accountability and the Carol and Lawrence Zicklin Center for Business Ethics Research at The Wharton School.

In the second year of the CPA-Zicklin Index, 78 percent of the 195 companies in the index increased their overall scores for political disclosure and accountability. The average score for the entire group grew from 38 points to nearly 51 points out of 100. The index measures the disclosure and accountability of the top 200 of the S&P 500 companies (five companies were omitted due to acquisitions and the fact that one company no longer has operations in the US) by studying company websites for seven key policy and practice indicators:

  • Disclosure of contributions or expenditures to candidates and committees
  • Disclosure of independent expenditures
  • Disclosure of payments to trade associations and other tax-exempt groups used for political purposes
  • Disclosure of payments to ballot measure committees
  • Archived reports on website of direct spending
  • Policy of regular board oversight
  • Semiannual posting of political spending report.

During the 2013 proxy season, the largest number of shareholder proposals were those asking companies to disclose political contributions and lobbying policies and expenditures. Of the 50 proposals submitted by The Center for Political Accountability, 24 came to a vote and received an average 32% support, 17 were withdrawn, and two were omitted. Investors submitted 52 proposals seeking a report on a company’s lobbying-related policies, procedures, oversight, and expenditures. Of those, 38 came to a vote and averaged 32% support, 10 were withdrawn and four were omitted. [For more information on the political contribution and lobbying shareholder proposals, read the Institutional Shareholder Services’ 2013 US Proxy Season Review (free registration required).]

UK moves forward on possible executive compensation Code amendments

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Institutional Shareholder Services (ISS) has asked institutional investors, companies and boards to weigh in on whether long-serving board members are at risk of losing their independent perspective.

In June 2012, the Financial Reporting Council (FRC) agreed to a request from the UK government to meet and decide on whether to amend the UK Corporate Governance Code to address a number of potential topics relating to executive compensation.

Those topics included whether large public companies should have clawback provisions in place, whether non-executive directors who are also executive directors in other companies should sit on the remuneration (compensation) committee, and what actions companies might take if they fail to obtain at least a substantial majority in support of a resolution on compensation (say on pay). [For more information about the UK executive compensation proposal, click here.]

The FRC decided to consider the request after the government’s legislation on voting and reporting on executive remuneration went into effect on October 1, 2013. To date, the FRC has not met to decide on this request.,

“The government’s new legislation underlines the importance of boards and investors engaging on directors’ remuneration,” FRC Chairman Baroness Hogg said. “The FRC is undertaking this consultation to understand if there is a case for changes to the Code.”

If changes to the Code are ultimately proposed, they would be subject to further deliberation in the first quarter of 2014. The new Code would then apply to accounting periods beginning on or after October 1, 2014.

Meanwhile, in the US the SEC is required to write rules that would allow companies to recoup compensation from executives for accounting restatements, even if fraud has not been committed. This was one of the Dodd-Frank Act mandates. It would go further than the Sarbanes-Oxley Act, which calls for disgorgement of compensation when there is a restatement because of “material noncompliance, due to misconduct.”