Executive Compensation: SEC to Explore Proxy Process in Roundtable, as Treasury Provides 162(m) Tax Guidance and Campaign Rhetoric on Buybacks Intensifies

August 29, 2018

As companies prepare the 2019 proxy, which will include the second official pay ratio disclosure, newly-issued IRS guidance on the tax deductibility of executive compensation promises to add an unexpected discussion point.  Meanwhile, intense political focus on share buybacks as well as an upcoming SEC Roundtable on the proxy process, which is likely to focus on proxy advisory firms, could also have an impact on the executive compensation landscape.

SEC Proxy Process Roundtable details to emerge: In late July, SEC Chairman Jay Clayton announced the SEC would host a “roundtable” discussion on proxy issues, citing five topics of potential discussion, including both proxy advisory firms and the process for submitting and voting on shareholder proposals, each with a set of detailed questions for staff consideration.

  • SEC Commissioners and the staff will hear from stakeholder groups regarding proxy process issues to determine whether official action, including potential rulemaking, is needed.

  • The Association’s Center On Executive Compensation plans to submit comprehensive comments on these issues in the coming months and engage the SEC as part of the roundtable process.  The Center also submitted a letter supporting the thorough examination of proxy advisory firms and shareholder proposals as part of the roundtable agenda.  The roundtable date and agenda have yet to be announced.

162(m) Transition Guidance published:  In a move that will impact executive compensation plan taxation and administration heading into 2019, the IRS recently released guidance on the changes to Section 162(m) in the 2017 Tax Cut and Jobs Act, including which amounts are covered by the grandfather provision.

  • The Tax Cuts and Jobs Act included a transition rule that grandfathered compensation payable pursuant to a legally binding contract in effect on November 2, 2017 as deductible by the company, rather than taxable under the rules of the revised Section 162(m).

  • The Guidance limited the applicability of the grandfather provision, stating that the ability of a compensation committee to exercise discretion to lower an award (i.e., “negative discretion”) removes the ability of the award to qualify for grandfather status under the rules.

SEC Commissioner nomination proceeds: President Trump’s nominee for the open Republican SEC Commissioner slot, Elad Roisman, has earned the approval of the Senate Banking Committee and is awaiting full Senate approval.

  • The SEC has functioned with only four of five Commissioners since the departure of Commissioner Mike Piwowar in July.  SEC rules require a quorum of three Commissioners to perform a rulemaking vote, allowing the two Democrat Commissioners to thwart the agenda of Chairman Jay Clayton.

  • Mr. Roisman’s nomination proceeded as part of the quiet approval of a larger group of financial agency nominees in the Senate Banking Committee.  Senate Majority Leader Mitch McConnell (R-KY) will likely seek to schedule the confirmation vote before the fall elections.

Political posturing engulfs governance, buybacks:  Since the adoption of comprehensive tax reform at the close of 2017, congressional Democrats have accused companies of negligently engaging in stock buybacks to strengthen financials and bolster executive pay at the expense of necessary reinvestment into the company and worker wages.

  • Democratic SEC Commissioner Robert Jackson released a study that found executives sold stock at an augmented frequency shortly after the announcement of buyback programs, adding to the furor over the connection between executive pay and buybacks.

  • A group of 20 Democratic Senators penned a letter urging SEC Chair Jay Clayton to examine buybacks through a public comment period “to review how companies are conducting buybacks under Rule 10b-18 and whether corporate insiders are exploiting buybacks to sell shares received as executive pay at inflated prices.”

  • Sen. Elizabeth Warren (D-MA), a likely 2020 presidential candidate, introduced a bill that would create the “Office of United States Corporations” within the Commerce Department.  The Office would have the power to issue, rescind, and revoke federal corporate charters, and require all large companies to be covered by the charter, thus further federalizing—and politicizing—corporate law.

  • The new federal charter would impose a broader set of governance requirements on covered companies, including a requirement to have a defined corporate purpose of “creating a general public benefit” which is “a material positive impact on society resulting from the business and operations of a United States corporation, when taken as a whole.”  It is modeled after state benefits corporation statutes.

  • The bill would also prohibit executives from selling shares within three years of the date of any corporate buyback program and would require executives to hold equity for five years.

  • The bill has no chance of advancing in the current Republican-controlled Senate but is aimed at injecting greater scrutiny of corporate behavior and further increasing Sen. Warren’s profile headed into the fall election cycle and in advance of the 2020 presidential campaign.