WASHINGTON — The Securities and Exchange Commission ordered corporations Thursday to provide shareholders with easy-to-understand reports on the compensation of top executives and opened the door for easier challenges to management policies.
The new rules, adopted after more than two years of study, are a significant expansion of shareholder rights. The measures take effect against a backdrop of public revulsion at excessive executive pay and complaints of entrenched corporate management.
"These sweeping reforms pave the way for shareholders to take back their companies," said Ralph V. Whitworth, president of the United Shareholders Assn., a stockholder rights group based in Washington.
A rising chorus of complaints about huge salaries, bonuses and stock options provided to managers of corporations--often poorly performing ones--led the SEC's approval of the directive to make better disclosure of the pay, bonuses and other compensation of top executives.
The SEC, embracing the philosophy that informed shareholders are the best judges of corporate conduct, stopped short of approving stockholder approval of executive compensation. But it is making it much easier for stockholders to learn about it.
"The best protection against abuses in executive compensation is a simple weapon--the cleansing power of sunlight and the power of an informed shareholder base," SEC Chairman Richard C. Breeden said. The issue became a hot political issue this year when President Bush was visiting Japan on a trade mission. When he complained about unfair trade, Japanese officials pointed to excessive U.S. executive salaries as a reason for the lack of U.S. competitiveness.
Under the new rules, the SEC will require companies to display executive compensation in a clear, concise manner. The information is now scattered in different sections of the company's proxy statement--a required annual report to shareholders--and often in murky prose.
Now the SEC says the information should be presented in a new summary table on a single page. The table "will capture all forms of compensation over a three-year period," Breeden said.
Another table will show the number of stock options--a promise by a corporation to allow executives to buy the firm's shares in the future at a price fixed today. If the stock rises, the options can be tremendously profitable, allowing the executive to purchase the shares at a cost far below the market value. The table will show either the current value of the stock options, or the potential value at various prices.
Breeden, a stern critic of what he views as excessive pay by poor corporate performers, noted that one firm gave its chief executive a "mega-grant," 10-year options to buy 2,750,000 shares of stock. If the stock rises at the same rate for the 10 years as it did during the last decade, the options would be worth a staggering $1.1 billion.
"Mega options make mini-sense for shareholders," Breeden said.
Sometimes, corporate chieftains' pay is so big that "you are not able to square it with a normal person's idea of what is right and wrong."
The SEC also passed regulations, over the opposition of corporate management lobbyists, designed to ease constraints on shareholder activism.
The agency voted, 4 to 0, to dismantle its complex structure of restrictions and permit unlimited freedom of speech for disgruntled shareholders and corporate critics.
"Shareholders will be completely free to publish their views in the press or the media without the SEC's permission," Breeden told the packed hearing room before the commission held its historic vote.
The SEC now forbids stockholders to communicate with more than 10 other shareholders without getting advance clearance from the agency, a cumbersome and costly process.
The law was written to cover battles for control of a company but expanded over the years to include any comments at all, even a statement in a newspaper or on television. A corporation could send "a battalion of lawyers" against dissident shareholders, accusing them of violating securities law and tying them up for years in court at huge personal expenses, Breeden said.
"Madison and Jefferson would be rolling in their graves if that's what they thought the First Amendment had come to," Breeden said. "We want the maximum latitude for people to speak up about the fate of their investments."
If politics worked the same way the SEC has been operating, Breeden said, "every time citizens wanted to discuss their views on President Bush, Bill Clinton or Ross Perot, they would have to file a description of themselves and their views with the SEC."
The new rules also will give shareholders a line-item vote, enabling them to support a single proposal, or a particular person for the board of directors. Currently, they must accept or reject an entire package of management proposals or a full slate of directors.
Shareholders will now be able to support dissident directors and still vote for selected individual members of the management slate.
When the new rules were proposed, they drew more than 2,000 comment letters, the most extensive public response of any SEC proceeding. The agency was flooded with pleas from corporations and big business organizations to delay, weaken or abandon the sweeping regulatory changes.