Business efforts to stifle a simple, congressionally mandated rule requiring public companies to disclose the ratio of CEO pay to the median-paid employee provides an insightful lens on the perversion of cost-benefit analysis.
Approved as part of the 2010 Dodd-Frank Wall Street Reform Act, Section 953b counts as the simplest of the 400 statutes that regulatory agencies must translate into rules with which business must comply. The U.S. Securities and Exchange Commission (SEC) proposed a rule in October, setting December 2 as the deadline for submitting comments. Public Citizen filed a formal comment with the SEC. In addition, more than 40,000 Public Citizen members and activists filed comments in support of this rule. To date, more than 105,000 commenters have filed letters in support of this rule.
This support reflects investor anger that CEO and senior management pay has escalated beyond economic justification. Pay for top-level execs now drains 10 percent of corporate profits where in 1990 senior management pay took only 5 percent. When finalized, the new rule will allow investors to “unit-price” CEOs. An investor weighing, say, a purchase of Oracle stock versus Hewlett Packard can now look to one more variable: Is the CEO relatively inexpensive, or costly? In this case, the Oracle multiple for CEO Larry Ellison would be more than 1,200 (expensive!) while Hewlett Packard’s Margaret Whitman is about 350 (certainly cheaper).
But K Street attorney Eugene Scalia (son of the Supreme Court justice) pioneered a roadblock for all such rules: cost-benefit analysis. In the case of “Business Roundtable v. the Securities and Exchange Commission,” he convinced the court that the SEC’s cost-benefit analysis of another mandated rule regarding nominations for corporate boards didn’t fully appreciate all the costs. In that specific case, the Business Roundtable argued that unions would cause pension fund managers to violate their fiduciary duty, which let them use the nomination of candidates to corporate boards as a bargaining tactic. It wasn’t that the SEC failed to respond to this absurdity; the court agreed with Scalia that the SEC didn’t respond enough.