Professor Robert Jackson Calls for Greater Transparency on Executive Pay

New York, June 13, 2011—The Securities and Exchange Commission must ensure that potential conflicts of interest are disclosed for the lawyers and consultants who help set executive pay at publicly traded companies, Columbia Law School Associate Professor Robert Jackson urges.

 

In a letter to the SEC, Jackson also argues, based on previous empirical work, that directors affiliated with large shareholders, such as private equity owners, should be allowed to set pay at public companies.

 

A leading expert on executive compensation, Jackson’s letter was submitted under the Dodd-Frank Act, which ushered in sweeping financial reforms in the wake of the 2008 market meltdown. While Dodd-Frank is nearly a year old, the SEC has yet to implement rules for many of its provisions, including those pertaining to executive compensation.

 

Jackson developed the comments with students in a new course, The Law, Economics, and Regulation of Executive Compensation. The students, Chang Chen ’12 and Julia Hoffman ’11, interviewed more than a dozen practitioners and consultants in the field to determine how the SEC should interpret Section 952, a lesser-known provision of Dodd-Frank that has important implications for corporate governance.

 

Based on this research, Chen, Hoffman, and Jackson called on the SEC to require disclosure—for the first time—of conflicts of interest for the lawyers who bargain over executive pay on behalf of public-company shareholders.   “The executive’s lawyer bargains over (pay) with a single objective: to pursue the best deal for the executive,” Jackson writes. “But the incentives of the (company’s) lawyers are often less clear.”

 

In-house lawyers often represent the company in these matters. “Certainly these lawyers will bargain forcefully on behalf of the committee,” Jackson notes. “But they will be bargaining against an executive to whom they report.”

 

A similar problem is faced by a company’s outside counsel, Jackson said, knowing that the executive they are “bargaining with today will decide which lawyers will be retained by the company for lucrative legal assignments tomorrow.” This is especially true of assignments related to mergers and acquisitions, Jackson argues, noting that the law firms among the top 10 mergers and acquisitions advisors in 2010 now employ more than 200 attorneys who focus largely on executive pay.

 

Separately, Jackson argues the SEC should interpret Dodd-Frank to permit directors affiliated with large shareholders—such as private equity funds—to serve on the committees that set executive pay at large public companies.

In prior research, Jackson has found that companies owned by private-equity investors link CEO pay far more closely to performance than firms without private-equity owners.

“These directors pursue the pay-performance deal closer to shareholder interests because they often are significant shareholders themselves,” Jackson argues.

 

The SEC should interpret Dodd-Frank to “ensure that directors are sufficiently independent from management to drive a hard bargain over executive pay,” Jackson said. He added that the evidence shows directors affiliated with private equity “do exactly that.” and should be allowed by the SEC to set executive pay at large companies.

 

The SEC’s final rules are expected to be adopted this summer.

 

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