In a letter to new SEC Chair Gary Gensler, the Council of Institutional Investors (CII) urged him to appoint a chief accountant who has “a deep understanding and appreciation for the needs of investors,” consistent with the 2008 recommendation of the SEC’s Advisory Committee on Improvements to Financial Reporting. The committee said investors are the “primary consumers of financial reports.”
“We fully agree with the Committee’s conclusion that ‘investor perspectives should be given preeminence’ in the development of financial accounting and reporting policies,” CII General Counsel Jeffrey Mahoney wrote to Gensler on April 22, 2021.
CII represents pensions, foundations, and endowments that manage about $4 trillion in assets combined.
“With a qualified investor or investor representative leading the Office of the Chief Accountant, that long-sought goal is much more likely to be achieved,” Mahoney wrote. “This goal is particularly timely and appropriate given the interest by investors in sustainability reporting and its interrelationship with financial accounting and reporting.”
Gensler, who took the helm of the agency on April 19, is in the middle of appointing division heads and senior staffers in his office. The first major division hire is Alex Oh as director of enforcement. She was a partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP and co-chair of the firm’s Anti-Corruption & FCPA Practice Group.
The influential group’s letter comes as some investor protection advocates have been worried about undue influence of the accounting profession, especially the Big Four firms. The chief accountants and their deputies have been from one of the Big Four firms, and some critics have been worried about revolving-door problems: They come from Big Four, and they go back to their former Big Four employers after working at the SEC for a few years.
In a separate letter to the SEC, CII’s Mahoney compiled a list of several rulemaking items that the group thinks the commission ought to prioritize. The chair of a regulatory agency sets the agenda.
In April 2019, CII petitioned the SEC to write a rule requiring public companies to clearly explain why and how they use adjusted financial metrics in the Compensation Discussion and Analysis (CD&A) section of the proxy statement. This is something then-SEC Commissioner Robert Jackson told Thomson Reuters that he believes the commission should seriously consider it. Jackson was on the short list to be the SEC chair when Joseph Biden was elected President.
CII asked the market regulator to revise its rules so companies will be compelled to follow the requirements that govern non-GAAP measures when they determine CEO pay to make sure that the metrics are not misleading. However, the SEC at the time signaled that it will not work on the rule.
The investor organization is worried that non-GAAP metrics used to be the exception in compensation committee reports, but now they have become the rule. In general, companies will often use non-GAAP metrics because they make their financial outlook better. In egregious instances, Audit Analytics observed that some companies double-adjusted executive compensation metrics by labeling the metrics in both earnings releases and executive pay in the same way but calculating the metrics differently.
“The CD&A is the most important source of information used by investors in evaluating executive compensation,” Mahoney wrote on April 22. “Investors often struggle to make sense of how companies assess performance in approving large compensation packages. The need for clarity is especially appropriate in the CD&A context because shareholders cast advisory votes on executive compensation regularly—every year at most public companies. The CD&A also informs investors’ understanding of a corporation’s governance more generally, and in voting on the election of directors.”
Among other priorities, CII said the SEC should also finalize a July 2015 proposal in Release No. 33-9861, Listing Standards for Recovery of Erroneously Awarded Compensation. Section 954 of Dodd-Frank mandated the SEC to adopt a rule requiring public companies to recoup bonuses paid to executives if the company is found to have misstated its financial results. It is intended to discourage executives from taking questionable actions that temporarily boost share prices but ultimately result in a correction of financial statements. Sec. 954 of PL111-203
The proposal is more stringent and broader in scope than the clawbacks under the Section 304 of the Sarbanes-Oxley Act of 2002. The requirements would be triggered by an accounting restatement, cover a wider group of executives, not just CFOs and CEOs. Executives would also not need to be found guilty of misconduct to return the compensation. Companies that fail to comply with the rule risk losing their stock exchange listing.
When Jay Clayton became chair of the SEC in 2017, he largely prioritized rules that responded to business needs and complaints that the public market requirements are too burdensome.
“CII acknowledges the observation of SEC Chairman Clayton that ‘several companies . . . [have clawback] policies [that] go beyond what would be required under Dodd-Frank,’” Mahoney wrote. “And that clawbacks for causes other than Dodd-Frank’s accounting restatements are supported by CII’s policies and the policies of some of our members. We, however, note that despite the requirements of Dodd-Frank, some companies’ clawback policies for restatements continue to require proof of misconduct and at some public companies clawback policies do yet exist. We believe finalizing the SEC’s 2015 proposal would address deficiencies in current practice and improve corporate governance by establishing a minimum standard for clawback policies at listed companies.”
This article originally appeared in the April 27, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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