Finally! After a mere two years, the SEC has managed to propose a long-awaited rule to implement Section 953(b) of the Dodd-Frank Act. If you have the patience to wade through it, you’ll get a small but powerful illustration of the stupendous idiocy of the entire enterprise, and of the inability of our legal system to handle it.
Sec. 953(b) reads as follows:
(1) The [SEC] shall amend section 229.402 of title 17, Code of Federal Regulations, to require each issuer [of covered securities] to disclose in any filing of the issuer described in section 229.10(a) of title 17, Code of Federal Regulations (or any successor thereto)
(A) the median of the annual total compensation of all employees of the issuer, except the chief executive officer (or any equivalent position) of the issuer;
(B) the annual total compensation of the chief executive officer (or any equivalent position) of the issuer; and
(C) the ratio of the amount described in subparagraph (A) to the amount described in subparagraph (B).
(2) Total compensation.–For purposes of this subsection, the total compensation of an employee of an issuer shall be determined in accordance with section 229.402(c)(2)(x) of title 17, Code of Federal Regulations, as in effect on the day before the date of enactment of this Act.
Got that? In substance, the to-be-amended regulations mandate disclosure of CEO compensation. 953(b) further requires public companies to calculate, disclose, and report the “pay ratio” between the CEO and the median pay of all other company employees. The statutory provision, like countless other DF provisions, leaves the agency in a bind.
Section 953(b) says “shall.” Failure to follow through—and even procrastination—is “agency action unlawfully withheld or unreasonably delayed.” Can’t do that, the SEC knows and notes: “We are proposing these amendments … in order to satisfy the statutory mandate of Section 953(b).” On the other hand:
[N]either the statute nor the related legislative history directly states the objectives or intended benefits of the provision or a specific market failure, if any, that is intended to be remedied.
If any. And:
[T]he lack of a specific market failure identified as motivating the enactment of this provision poses significant challenges in quantifying potential economic benefits, if any, from the pay ratio disclosure.
If any. To translate the agency-speak: we have absolutely no idea what the problem is to which this provision is supposed to be the solution, and we can’t imagine what good it could possibly do.
In a footnote, the SEC summarizes the submissions of “commenters supporting Section 953(b) [who] have emphasized that potential benefits could arise from adding pay ratio-type information”:
Americans for Financial Reform (“Existing requirements mandate disclosure of top executive compensation only, encouraging companies to focus unduly on peer to peer comparisons when setting CEO pay. . . . Disclosure of CEO-to-worker pay ratios will encourage Boards of Directors to also consider vertical pay equity within firms.”); Calvert Investment Management (“The disclosure required by Section 953(b) will help investors understand how issuers are distributing compensation dollars throughout the firm in ways that may help improve employee morale and productivity.”); CtW Investment Group (“The new disclosure offers an insight into compensation within the entire organization, and provides a different way for boards and shareholders to evaluate the relative worth of a CEO.”); and UAW Retiree Medical Benefits Trust (“[W]e view Section 953(b) as an essential tool that will increase corporate board accountability to investors . . . a comparison between CEO and employee pay may help shareholders identify the board’s strengths and weaknesses, and may provide insight into [the board's] relationship with the CEO.”).
Say what? The SEC knows that this is nothing but hot air; acknowledges it; and desperately begs for support in finalizing the rule:
[W]e are particularly interested in receiving information relating to material, direct economic benefits to investors or shareholders of the affected registrants derived from the pay ratio disclosure.
Translation again (and pardon the French): we’d really like to know why any investor or shareholder, whose interests we are supposed to serve, should or would give a flying f^$ about the “pay ratio.” The question is on our minds especially because the costs of the disclosure requirement will be very substantial. The paperwork burden alone, says the agency (with the phony accuracy that always accompanies such estimates) will come to “approximately 545,792 hours of company personnel time and total costs of approximately $72,772,200 for the services of outside professionals.” That’s what it takes to comply with, e.g., a
Proposed Instruction for Pay Ratio Disclosure When the Registrant Omits Salary or Bonus Information for the PEO in Reliance on Instruction 1 to Item 402(c)(2)(iii) and (iv), and Proposed Technical Amendment to Item 5.02(f) of Form 8-K
Moreover, the SEC acknowledges that the paperwork costs are only a minor piece of a picture that includes other compliance costs, costs to competition, corporate efficiency, and capital formation—things that the agency by law must consider. (Example: any idiot can drive down the pay ratio by firing low-paid employees and hiring contractors instead. The SEC must consider the prospect of that real cost, even if the geniuses who wrote the statute did not.) The actual costs will depend on who is covered, how stringent or flexible the requirements are (if a multi-national corporation pays its foreign employees in their domestic currency, what exchange rate should it apply to calculate the “median” pay on an annual basis?), and countless other questions (who exactly is an employee?). One way or the other, though, the agency is stuck with a mandate to issue a rule that is ipso facto arbitrary and capricious: it has no discernible rationale; no discernible benefits; and a ton of costs. “What the hell are you doing?” is not an unreasonable question, and the D.C. Circuit is sure to ask it.
This is not some fluke: it is the usual pattern under Dodd-Frank.
Two Ways Out
Let’s spell out what everyone knows, including the SEC: Section 953(b) is the product of Elizabeth Warren and her cohorts—the unions (hence the UAW comment on the rule) and the Occupy Wall Street crowd (aka “The Other One Percent”). The rule has the clear and obvious purpose to discredit corporations and their management and to hand this gang another weapon for PR purposes, in proxy fights, and quite possibly in court. The perceived market failure is a failure in the public opinion market: not everyone thinks (yet) that all CEOs are over-priced thugs, and that information failure has to be fixed. If it costs the corporations a lot of money, all the better: it’ll all come out of the CEO’s pocket. Also, 545,792 hours of company personnel time and $72,772,200 for outside services to comply with a single, minor rule? Think of all the other, much bigger, 600-plus Dodd-Frank rules: we’re creating green eyeshade jobs and putting America back to work! Senator Harvard Professor Doctor Indian Chief Warren really is that stupid. But hardly anyone else is, and no one on the D.C. Circuit is. If you’re the agency, what’s your move?
One option is to fake your way through and hope for a conservative panel on the D.C. Circuit. When you get gunned down, you put a postage stamp on the opinion and send it to the White House and the Times and the Post as yet another example of the “Ted Cruz Circuit” that’s blocking the implementation of duly enacted laws. (It’s been done many times.)
The other option is to switch the baseline. “Look,” an agency could say, “the statute is a disaster, but it commands this. We’re doing everything we can to minimize the damage. You (court) should chalk up all the costs to the statute, and count as benefits the damage we’ve chosen not to inflict.” (The argument is way more complicated in real AdLaw, but that’s the substance and the generic form.)
Read the SEC’s proposed pay-ratio rule (or else trust me): that’s what the SEC is trying to do here. Throughout, it proposes exemptions, flexibility in calculating the pay ratio, and other measures to ensure that the requirement will go no further than it absolutely has to. The SEC seems prepared to skate pretty close to the edge: its proposed rule grants corporations so much flexibility in calculating median salaries that cross-firm comparisons may become nearly meaningless. Such comparisons, though, are just what the rule intends, albeit to no other intelligible end. Other agencies (including the Fed) have likewise acted on a this-law-can’t-mean-what-it-says principle, even at the price of getting hammered in the courts. To my mind, that’s a sensible and even honorable thing to do. It’s the opposite of a “run-away administrative state.” In this context, it may be more useful to think of the SEC and its ilk as a governmental National Review: they stand athwart the democratic branches, yelling “Stop!” But there’s also something very disturbing about it.
Is there, could there be, a name for the “we’re doing as little harm as we can” defense of Dodd-Frank regulations? Perhaps, the Christianity Defense: confronted with the prospect of stern (“hard look”) judgment, agencies heap all the justice for the sins of government on some other guy/institution and claim all the D.C. Circuit’s mercy for themselves. That’s way off, though. The point isn’t that Congress is free from sins but willing to take them on; it’s that it has committed them. Closer, perhaps, is the Albert Speer Defense: we’re just trying to keep worse things from happening. That would be a fine defense for individual officers genuinely so disposed, but not for a permanent agency or office. The true defense, then, is the Insanity Defense:
We [agency] are subject to arbitrary and capricious review, and we will gladly submit to it. But we must follow the commands of a body that is in the business of being arbitrary and capricious; has manifestly gone ape; and is subject to no meaningful constraint. We have exercised our discretion to produce the lesser evil of colossal waste, in the interest of avoiding the greater evil of doing what Congress told us to do. Over to you, judge.
I can write that brief in an hour. What I can’t write is the opinion.