Showing posts with label SEC COMMISSIONER MICHAEL PIWOWAR. Show all posts
Showing posts with label SEC COMMISSIONER MICHAEL PIWOWAR. Show all posts

Saturday, May 2, 2015

SEC COMMISSIONER PIWOWAR'S STATEMENT ON EXECUTIVE PAY VERSUS PERFORMANCE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
PUBLIC STATEMENT
Statement at Open Meeting on Pay versus Performance
Commissioner Michael S. Piwowar
April 29, 2015

Thank you, Chair White, and a special thank you to Mike Walker of the San Francisco Regional Office for getting in early to set up the video conference.

It has been nearly five years since the enactment of the Dodd-Frank Act, which required the Commission to promulgate nearly a hundred different rules, some of which were actually related to the causes of the financial crisis.  I do not question the fact that we will ultimately need to implement all of our obligations under that law.  I do question, however, the order in which we are considering them.  Instead of prioritizing those rules related to the causes of the financial crisis, we have repeatedly seen the agenda for Dodd-Frank Act implementation filled with rulemakings not related to the financial crisis, such as conflict minerals, mine safety, and resource extraction.  Unfortunately, this proposal represents another questionable and imprudent use of agency resources, which I cannot support while other important rulemakings remain outstanding.

That being said, I had indicated my willingness to consider supporting, at an appropriate time, the implementation of Section 953(a) of the Dodd-Frank Act using a principles-based approach requiring a clear description of the relationship between executive compensation actually paid and the financial performance of the issuer.  Indeed, the approach initially circulated by the staff to the Commissioners, after obtaining approval from the Chair’s office, was one that I might have been able to support.  I thank the staff in the Division of Corporation Finance, the Division of Economic and Risk Analysis, and the Office of the General Counsel for their efforts on crafting that principles-based approach.

Unfortunately, the revised document being considered today has been changed to be a highly prescriptive measure.  It focuses particular attention on a single metric of financial performance – one-year total shareholder return (TSR).  This one-size-fits-all approach assumes that, for all companies and all shareholders, one-year TSR is the only metric that matters.  Although the proposal points out that issuers may include additional disclosures and different metrics, the proposal would only provide specific tags for one-year TSR.  Other metrics and disclosures would be relegated to block-tagging in a form not conducive to comparative analysis.

As one paper from the National Association of Corporate Directors observed, “an isolated emphasis on TSR can result in excessive focus on quarterly financial numbers and encourage short-term thinking.”[1]  To the extent that the prescribed measure of TSR may be less meaningful at particular companies, a principles-based approach could reduce shareholder confusion in understanding the relationship between pay and performance.

The majority of the Commission is pushing forward with the focus on one-year TSR, despite the economic analysis performed by our economists in the Division of Economic and Risk Analysis.  The analysis observes that which performance metrics should be considered, and how much compensation should vary with these metrics, is difficult to ascertain and will vary with a company’s individual circumstances.  Our economic analysis further notes that the available performance statistics may not adequately measure a given executive’s contribution to a registrant’s performance, such as when registrant performance is strongly related to market moves, sector opportunities, commodity prices, or other factors unrelated to managerial effort or skill.

I am greatly disappointed that the proposal does not exclude smaller reporting companies from the disclosure requirement.  Shares of smaller reporting companies are generally less liquid than shares of larger reporting companies.  Thus, estimates of one-year TSR for smaller reporting companies may be less precise and less readily available, potentially making pay-versus-performance comparisons based on this metric less meaningful.

Trying to limit executive compensation through regulation has a habit of backfiring; one need only look at Section 162(m) of the Internal Revenue Code and its attempt to limit executive compensation that, some have argued, had the unintended consequence of increasing executive pay.[2]

Finally, the singular focus on one-year TSR may make corporate executives more likely to engage in efforts such as increasing debt, cutting research and development, and engaging in stock buy-backs to increase stock prices in the short-term to the detriment of long-term performance.  On the other hand, a principles-based approach would reduce the risk that the disclosure requirements could lead registrants to game their compensation structures.

For these reasons, I cannot support the current proposal to implement pay-versus-performance disclosure.

I have no questions.


[1] NACD Perspectives Paper: Pay for Performance and Supplemental Pay Definitions (Dec. 2013) at 3, available at http://www.farient.com/wp-content/uploads/2013/12/NACD%20PERSPECTIVES_Pay%20Definitions.pdf.

[2] See, e.g., Max Ehrenfreund, “Why Elizabeth Warren thinks Bill Clinton made CEO pay even worse,” The Washington Post (Apr. 27, 2015); “Speech by SEC Staff: Financial Regulation: Economic Margins and Unintended Consequences,” by Chester S. Spatt (Mar. 17, 2006),

Tuesday, April 8, 2014

SEC COMMISSIONER PIWOWAR'S REMARKS AT ANNUAL INTERNATIONAL INSTITUTE FOR SECURITIES MARKET DEVELOPMENT

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

SPEECH

 Welcoming Remarks at the SEC 24th Annual International Institute for Securities Market Development

Commissioner Michael S. Piwowar
Washington, DC

April 7, 2014

Thank you, Paul [Leder], for that kind introduction, and I want to welcome you back to the Commission.  Paul previously worked at the Commission for more than a decade from 1987 to 1999 and now has been with the Commission as Director of the Office of International Affairs for almost two months.  I have enjoyed working with you and look forward to continuing to work with you in the international arena to promote investor protection, cross-border securities transactions, and fair, efficient and transparent markets.  I also want to thank the Office of International Affairs staff who worked so hard to organize this two-week training initiative and all of the speakers, moderators, and panelists who have generously invested much time and effort in making this program so worthwhile.    

I am excited to be here with you this morning to welcome you to Washington, DC and to the SEC’s 24th Annual International Institute for Securities Market Development.  In my previous tour at the Commission as an economist in what is now the Division of Economic and Risk Analysis (DERA), I had the privilege of participating in this program.  I, therefore, know from firsthand experience the importance and usefulness of this global training program.  In fact, this program is an integral part of the Commission’s longstanding commitment to promote the adoption of high quality regulatory standards worldwide.

Before I continue, I need to provide the standard disclaimer that my remarks are my own and that they do not necessarily reflect the views of the Commission or my fellow Commissioners.  As you participate in this great program over the next two weeks, I hope you keep a couple of things in mind.

First, the benefits from this program are not a one-way street.  This program provides the Commission with the opportunity to build relationships with regulators from around the world that help us in our work to protect our markets and investors.  We often require assistance from regulatory authorities abroad for cross-border enforcement and oversight efforts.  Many of our investigation and enforcement efforts require banking, brokerage or telephone records, testimony, and other evidence from jurisdictions outside the United States.  The contacts we have forged through this program over the past several years have considerably advanced our investigations and examinations, including arrangements for freezing fraud proceeds.  I also hope that the program provides you with the ability to build relationships with other participants as well as with us that will help in your enforcement and oversight efforts.

Second, when it comes to securities markets regulation, one size does not fit all.  The program has been carefully designed to include sessions that use terms like “best practices” and “key concepts,” as well as workshops featuring case studies and panel discussions with regulators from multiple jurisdictions.  I hope that none of you leave the conference with the notion that your markets should have the same regulations as us or as each other.  Rather, each of you should take the lessons that you find valuable from this program and use them to tailor your regulations to the particular characteristics and circumstances present in your own securities markets.

I would also like to take this opportunity to briefly elaborate on the effects of regulation on securities market development and the importance that these markets have on economic growth.  The participants in the securities markets, of course, include the issuers of securities, the investors that buy and sell those securities, and the institutions – brokers, dealers, exchanges, alternative trading venues, clearing agencies, etc. – that help facilitate transactions in those securities.

Many of our regulatory efforts are viewed through the lens of investor protection.  It is through this lens that we evaluate the duties of securities issuers to disclose meaningful information to potential investors so that they can make informed investment decisions, and the duties of market participants to treat investors fairly when transacting in securities.  Through the investor protection lens, we also determine the appropriate risk-based methods to monitor compliance with those duties and to enforce them.

But, the Commission’s core mission goes beyond protecting investors and maintaining fair, orderly, and efficient markets.  The third part of our statutory mission is to promote capital formation.  I hope that, even if your regulatory mandate does not explicitly include promoting capital formation, you always seek to balance the needs of businesses with the needs of investors.

As U.S. Senator Mike Crapo (R-ID), Ranking Member of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, which is the authorizing committee of the Commission and the other financial regulators, likes to say “Capital is the lifeblood of…businesses, which in turn are the engines of job creation and economic growth.”[1]  Conversely, regulation that is overly burdensome or restrictive will inhibit capital formation and economic growth.

 I want to focus the remainder of my remarks on capital markets.  By capital markets, I mean the stock and bond markets.  While capital markets are only a component of the overall securities markets, they are, in fact, the lifeblood of businesses, which are the drivers of economic growth.  

Effective Regulation Promotes Capital Market Development

An overarching theme of this program is that a jurisdiction’s institutional and regulatory policy framework can strongly influence capital market development.  The notion that there is a close relationship between financial regulation and capital markets is not new.  The specialized field of economics known as “law and finance” has established, for example, that countries with better investor protections, measured by both the character of legal rules and the quality of enforcement, tend to have larger and deeper capital markets.[2]  The academic law and finance literature has produced many other findings with key policy implications.  While I do not have time today to properly review all of the findings in this area, I do want to mention one important paper released last month entitled Capital Markets and Economic Growth: Long-Term Trends and Policy Challenges, which, among other things, looks at a particular interaction involving a country’s financial regulatory system and its tax system, and the resulting effects on capital market development.[3]

In that paper, two German finance professors, Christoph Kaserer and Marc Steffen Rapp, find that the regulatory and tax systems governing retirement savings in an economy play an important role in capital market development.[4]  The professors posit that more favorable tax and regulatory frameworks for retirement savings cause domestic stock markets to be larger and are likely to exert a positive influence on capital market depth.  They estimate that increasing the size of pension funds by 10 percentage points of gross domestic product (GDP) would lead to an increase in stock market size of 7 percentage points of GDP.  Kaserer and Rapp recommend that retirement savings rules and tax laws be designed in a way that encourages a larger part of national savings to be invested through the capital markets.

Capital Market Development Promotes Economic Growth

Capital markets are a significant source of financing for the corporate sector and play an integral role in economic growth.  Equity markets, in particular, are of prime importance for economic development.  More liquid stock markets – where it is less expensive to trade equities – reduce the disincentives to investing in long-duration projects because investors can easily sell their ownership interest in the project if they need their savings before the project matures. Therefore, enhanced liquidity facilitates investment in longer-run, higher-return projects that boost productivity growth.[5]

Due to the limited availability of debt-based financing for high-risk projects, access to equity financing also may spur innovation.[6]  Moreover, the fact that shareholders are residual claimants means they have a much stronger incentive to exert control over the investment decisions of a company than debt holders.  Active investors, including institutional investors, may use their expertise to push for changes that could lead to enhanced performance and stock price growth.

It is also important to note that stocks, unlike debt in many cases, are information sensitive, which leads to more information gathering incentives by outside investors than debt financing does.[7]  Kaserer and Rapp argue that the availability of funds for long-term risky investments combined with the incentives for improving corporate governance would result in an estimated one-to-one relationship between stock market growth and the long-term real growth rate in GDP, i.e., stock market growth of one-third would increase real economic growth by one-third.[8]  Overall, they estimate that growing capital markets by one-third would increase the long-term real growth rate in per capita GDP by about 20%.[9]

Importantly, the Kaserer and Rapp study shows that the balance between capital market finance and bank lending matters.  An overreliance on banks comes at a cost in terms of reduced economic growth.  The study also documents that capital markets are good for research and development (R&D).  European firms’ R&D intensity is positively correlated with the level of equity financing.  In contrast, firms in bank-based economies have less flexibility in their financing decisions and therefore follow a more conservative financing strategy, which might lead to underinvestment in R&D.

A Virtuous Circle

To sum up, effective regulation leads to capital market development.  Capital market development, in turn, leads to economic growth.  Economic growth improves standards of living of people in your jurisdictions in a number of ways, including reducing poverty and promoting savings, investment, innovation and job creation.

But, it doesn’t stop there.  Growing your capital markets not only benefits your own economy, but it also benefits markets and economies globally.  Better developed capital markets and more dynamic economies provide consumers with the ability to purchase more products and services from around the world and investors with the ability to invest globally, which provides businesses access to additional sources of capital.  A rising tide lifts all boats.

If we all adopt high quality regulatory standards in our own jurisdictions and work together to promote high quality standards worldwide, we can create what economists call a “virtuous circle” – a positive chain of events that reinforces itself through a feedback loop – in which everyone benefits.  This two-week program represents an important step in establishing such a virtuous circle to improve standards of living worldwide.

Thank you for your attention.  Enjoy the program.


[1] See, e.g., News Release: Ranking Member Crapo's Statement at FSOC Annual Report Hearing (May 21, 2013), available at http://www.crapo.senate.gov/media/newsreleases/release_full.cfm?id=342841.

[2] See, e.g., Rafael La Porta et al., Legal Determinants of External Finance (July 1997), available at http://scholar.harvard.edu/shleifer/files/legaldeterminants.pdf and Rafael La Porta et al., Law and Finance (Dec. 1998), available at http://www.jstor.org/stable/pdfplus/10.1086/250042.pdf?acceptTC=true&jpdConfirm=true.

[3] I thank former SEC Commissioner Kathleen Casey for bringing this paper to my attention.

[4] Christoph Kaserer & Marc Steffen Rapp, Capital Markets and Economic Growth: Long-Term Trends and Policy Challenges (Mar. 2014), available at http://www.aima.org/en/education/research-into-capital-markets-and-economic-growth.cfm.      

[5] See Ross Levine and Sara Zervos, Stock Markets, Banks, and Economic Growth (June 1998), available at http://www.isid.ac.in/~tridip/Teaching/DevEco/Readings/07Finance/06Levine%26Zervos-AER1998.pdf.

[6] See Po-Hsuan Hsu et al., Financial development and innovation: Cross-country evidence (Feb. 2013), available at http://ac.els-cdn.com/S0304405X13003024/1-s2.0-S0304405X13003024-main.pdf?_tid=b0301ee2-be61-11e3-a531-00000aacb35d&acdnat=1396881432_07b3612fbfae3e71a910a56125ccfd26.  

[7] See Christoph Kaserer and Marc Steffen Rapp, Capital Markets and Economic Growth: Long-Term Trends and Policy Challenges (Mar. 2014) .  

[8] Id.

[9] Id.

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