As you are no doubt aware, there were several important public policy developments last week that impact executive compensation. In case you are feeling overwhelmed by the number of articles (!!) about these issues, here is what you need to know.
Chevron Overturned
In a landmark ruling, the Supreme Court significantly reduced the ability of federal agencies like the SEC to issue broad regulation (the Court also drastically cut back the SEC’s power to impose financial penalties on companies).- What it means: The Court ruled that judges should no longer defer to agency interpretations and expertise when a rule is challenged. Instead, judges have free rein to invalidate rules when agencies overstep – meaning the SEC will find it much harder to issue broad regulations like climate and HCM mandates that are not clearly “in scope.”
- What could happen: The decision highlights the need for “express delegation of authority” from Congress when proposing regulation. One way around this is simply for Congress to emphasize clear delegation when it passes a law requiring the SEC to implement regulations (such as with Dodd-Frank). Another is for Congress to pass more laws in the absence of agency regulation (this seems unlikely in the current environment, but stranger things have happened).
Fifth Circuit Reinstates Proxy Advisor Rule
Meanwhile, in a surprising but welcome win, a judge has required the SEC to reinstate Center-supported, common-sense rules regulating how proxy advisors do business.- What it means: The 2020 rules, which the SEC gutted before they could even take effect, require proxy advisors to make their reports available to companies at least at the same time as investors (if not sooner) and give investors any feedback from companies about the report. Taking offense at this very mild concession, ISS sued the SEC and the rule was rescinded – but the courts have now found this unjustified.
- What could happen: Unless the SEC wants to take this to the Supreme Court, they will likely reinstate the employer-friendly “notice and comment” provisions – which is a major win for companies. Boards will be able to review ISS and Glass Lewis reports and respond – before investors vote.
FASB Requires Worker Pay Disclosure
Finally, in a unanimous decision, FASB mandated quarterly disclosure of employee compensation (among other things) in each expense line item on the income statement. This will include salaries, bonuses, equity grants and medical and pension benefits, but won’t include a total compensation figure. The rules are effective for 2027 annual reports and 2028 quarterly reports.- What it means: This falls far short of calls from the Working Group on Human Capital Accounting to mandate detailed breakdowns of worker compensation, but will still involve significant costs to companies with comparatively little investor benefit.
💡One last thing - if you haven’t already, make sure to register for our July 16 webinar – we’re giving you the best strategies for responding to tricky shareholder proposals, especially on ESG and compensation topics.
