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.
Politico promotes a blurb about a new white paper trashing Dodd-Frank rules regulating energy derivatives, identifying the author as “former [George W Bush Administration] Energy Secretary Abraham Spencer.” What Politico fails to mention is Abraham’s role as a lobbyist for the energy industry that has much to gain from relaxing Dodd-Frank’s derivative rules. Politico neglects to cite his role as head of The Abraham Group LLC, with its non-public list of consulting contracts; his role as the head of Abraham & Roetzel, which is paid by firms such as Cheniere Energy; or his vocation as Vice-Chairman of the Board at Occidental Petroleum. In the latter capacity, Mr. Abraham was paid over $700,000 in 2012 alone, and currently holds over $3 million worth of Occidental stock. Occidental is relevant because it operates a major energy trading subsidiary, Phibro, which Occidental purchased from Citigroup in 2009 for a steal. Phibro is a major player in energy derivatives markets, and stands to financially gain if Congress follows Abraham’s advice in the white paper and relaxes rules for such energy traders under Dodd Frank. Reporters have done this before, as when former Senators Lott and Dorgan advocate on energy policy and reporters fail to mention their lobbying on behalf of energy corporations. For Spencer Abraham, his cachet as former Energy Secretary provides credibility as he advocates deregulation on behalf of his energy trading clients and employers. Opinions for hire is what corporate lobbying interests rely on to gain influence, and journalists have to do a better job mandating full disclosure of former public official’s current lobbying ties.
Tyson Slocum is Director of Public Citizen’s Energy Program. Follow him on Twitter @TysonSlocum
Tax loopholes that enable corporations to deduct CEO pay in excess of $1 million could be costing American taxpayers hundreds of millions of dollars, according to a report released this week by Public Citizen.
In 2012, the 20 highest paid CEOs were paid base salaries totaling $28 million but received performance-based compensation totaling $738 million, Public Citizen discovered. For executive pay above $1 million, publicly traded companies may deduct only that which is based on performance or other incentives. If these companies paid the statutory 35 percent corporate income tax rate, their use of the performance-based compensation loophole for just those 20 CEOs cost American taxpayers $235 million.
“Especially during a long-term recession giving rise to major cuts in public services, and after American taxpayers bailed out Wall Street to the tune of trillions of dollars, it’s unconscionable that we continue to subsidize CEOs’ exorbitant salaries,” said Lisa Gilbert, director of Public Citizen’s Congress Watch division.
In 1993, when the CEO-to-median worker pay ratio was about 200-to-1, section 162(m) of the Internal Revenue Code was amended to limit publicly traded corporations from deducting more than $1 million in compensation. However, this amendment included a loophole that allowed corporations to continue to deduct certain types of executive pay. This loophole exempted compensation that is “payable solely on account of the attainment of one or more performance goals.”
Investor choice is so overrated.
That’s what a securities industry executive and lobbyist wants us to believe about a bill in Congress that aims to restore investors’ legal rights.
Overwhelmingly, brokerage firms use their contracts with investors to force their customers to resolve disputes in a private system called arbitration. This means that if an ordinary investor thinks she was wronged by her broker-dealer, she cannot exercise her basic right to go to court because the non-negotiable contract terms forbid her from doing so.
Kevin Carroll of the Securities Industry and Financial Markets Association complains about “the unilateral right” that investors would have if they could choose to go to court instead of being forced into arbitration. To Carroll, it is more appropriate for the industry to be able to unilaterally eliminate investors’ access to the courts and to dictate how disputes should be resolved, then to let individual investors have their day in court.
Carroll laments that restoring investors’ choice would lead to the decline of an arbitration process that his industry controls and influences through the industry-run Financial Industry Regulatory Authority (FINRA). But why should he worry? If the arbitration system is fair, as his industry contends, then investors will continue to use it after they are able to weigh their options.
He further asserts that if investors had the option to choose arbitration or court, they may make the wrong choice. And he suggests that investors don’t need the court system, because “reasonable people, familiar with the (arbitration) process,” will work to improve it. His paternalistic stance is a clear admission of a fox who wants to continue guarding the henhouse.
Millions of us are ordinary or small investors who use brokerage firms and broker-dealers to help us invest our life savings. We rely on broker-dealers to provide expert advice on investments. But sometimes things go wrong. Sometimes customers suffer financial losses, not because of the usual risks posed by investing money, but because of misconduct by unethical or careless broker-dealers.