BILL ANALYSIS �
SB 1208
Page 1
SENATE THIRD READING
SB 1208 (Leno)
As Amended May 7, 2012
Majority vote
SENATE VOTE :21-15
JUDICIARY 6-2 APPROPRIATIONS 9-4
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|Ayes:|Feuer, Atkins, Dickinson, |Ayes:|Blumenfield, Bradford, |
| |Monning, Wieckowski, | |Charles Calderon, Campos, |
| |Bonnie Lowenthal | |Davis, Gatto, Hill, Lara, |
| | | |Mitchell |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Gorell, Jones |Nays:|Harkey, Donnelly, |
| | | |Nielsen, Wagner |
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SUMMARY : Requires a publicly traded corporation to disclose, in
its annual statements to the California Secretary of State
(SOS), the names of, and the annual compensation paid to, the
corporation's five most highly compensated retirees.
Specifically, this bill :
1)Modifies an existing requirement that publicly traded
corporations doing business in California file a statement
with the SOS that includes the name and compensation of the
corporation's five most highly compensated executives, in
order to specify that the five named executives shall consist
of the Principal Executive Officer (PEO), the Principal
Financial Officer (PFO), and the three most highly compensated
executives who are not either the PEO or the PFO.
2)Provides that the statement described above shall also include
the total compensation paid to the five mostly highly
compensated retirees for the most recent fiscal year.
Specifies that the statement must also include the name of
each of those five retirees.
3)Defines "total compensation," for purposes of the above, to
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include the number of shares issued, options for shares
granted, and similar equity-based compensation, and all
perquisite and other personal benefits, so long as the
compensation is granted, awarded, or paid to the person after
the person's retirement from the corporation for services
rendered in all capacities to the corporation and to its
subsidiaries prior to his or her retirement.
FISCAL EFFECT : According to the Assembly Appropriations
Committee, the SOS would incur a one-time cost of about $50,000
to modify current Information Technology programs and business
documents. Funding would come from the Business Fees Fund.
COMMENTS : According to the author, this transparency bill
attempts to "address the lack of public disclosure as to what
highly compensated retirees at publicly traded corporations are
actually paid during each year of the retirement." The author
believes that disclosure of this information is especially
important in light of the recent reports showing that executive
compensation of all kinds has grown dramatically while salaries
and benefits to the "average worker" remain stubbornly stagnant.
Partly in response to the widespread critiques of executive
compensation, including retirement compensation, the U.S.
Securities & Exchange Commission (SEC) revised its disclosure
rules, effective in 2007, to require that retirement benefits be
more fully and clearly disclosed. (See 17 Code of Federal
Regulation (CFR) 229.402 (h) (1).) In addition to requiring
more information, the 2007 rules required that retirement
pension tables be disclosed in separate tables in SEC-required
proxy statements. (The proxy statements are filed with the SEC
and are also posted on the company's Web site.) The new rules
also require that tabular information be accompanied by a
"succinct narrative description" that explains the elements in
the tabular information. (Id. (h) (3).) The tables on pension
benefits must include five elements: 1) The name of the
executive officer; 2) the name or type of retirement plan; 3)
the number of years of service credited to the named officer; 4)
the actuarial "present value" of the executive's accumulated
benefit to date; and, 5) the dollar amount of any payments and
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benefits paid to the named executive officer in the last fiscal
year. The new rules also require information on "deferred
compensation" plans. (17 CFR 229.402 (i).) A "deferred
compensation" plan is not technically a retirement benefit, even
though it often creates an obligation that continues after the
executive leaves the company. A "deferred compensation" plan is
simply an agreement between the company and the executive that
services presently performed by the executive will be
compensated at some point in the future. This apparently
creates a tax advantage for the executive or employee, who
presumably will receive the compensation when his or her overall
income - and corresponding tax obligation - will be lower.
While the new SEC disclosure requirements do indeed require that
proxy statements include detailed information about executive
pensions, from the perspective of those who support this bill
the SEC requirements have one critical flaw: they only apply to
the top five covered executives (i.e. PEO, PFO, and three
highest compensated executives) who are currently employed, and
not to the retirees who have left the company. In other words,
the SEC requirements only require disclosing the executive's
retirement plan, his or her years of service, and the "present
value" of any accumulated benefits.
Thus unless one of the five most highly compensated executives
has already retired, there will be nothing to put in the fifth
column of the table that requires the amount of payments made
during the last fiscal year. This is clearly illustrated by
sample proxy statements provided to the Judiciary Committee by
the opponents of this bill. These proxy statements do indeed
show that the proxy statements provide tables and useful
narratives that explain the retirement packages that are given
to executives, and they include an estimate of the present value
of accumulated benefits. But in nine of the eleven sample proxy
statements, the amount listed in column five for each of the
five covered executives is, not surprisingly, $0, because this
table only applies to current executives who have not yet
retired. This bill seeks to fill that transparency gap. Of the
other two proxy statements provided to the Judiciary Committee,
AT&T listed an amount for just one of its five covered
executives and MetLife listed an amount for two of its nine
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listed executives. Apparently, these companies have retirees
who are still among the mostly highly compensated executives
even though they have retired, and/or the executives have
retired within the past fiscal year.
Both supporters and opponents of this bill apparently agree that
corporations should disclose compensation information to
shareholders, potential investors, and the public generally.
Where they appear to disagree is as to whether the SEC
disclosure requirements described above are adequate.
Supporters of this bill contend that existing SEC rules do not
require disclosure of what a corporation actually pays out to
someone who has already retired, but instead leaves this to be
extrapolated, if this is possible, from information about the
nature of the pension plans provided to current executives.
Opponents of the bill do not appear to dispute this in all ways,
but instead argue that proxy statements provide enough
transparency to permit a shareholder or potential investor to
evaluate the company's pension policies and estimate the
company's ongoing obligations to its top level executives.
After all, the proxy statements list the name, the specific type
of plan, the years of service, and the accumulated benefit to
date. From this, opponents suggest, one could potentially make
a reasonable projection of what those five named executives will
receive once they retire. Opponents seem to suggest that it may
be even more valuable for shareholders and investors to have
this information "prior to any top executive's retirement" in
order to "provide full transparency and public awareness of a
company's intentions."
In a much cited work, Ellen Schultz's, Retirement Heist
(2011)(Schultz is a reporter for the Wall Street Journal)
published after the 2007 rules went into effect, Ms. Schultz
proclaims that much of the most "shocking" evidence for her
expose is "detailed in the SEC filings." (Schultz, Retirement
Heist at 100.) However, Ms. Schultz contends that some forms of
compensation will not necessarily appear in the required
retirement compensation tables - such as "departing gifts" to
executives just before they retire (Id. at 109) and complex
schemes whereby a company takes out life insurance policies on
some employees (often low-level employees) and then uses the
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death benefits (with the company as beneficiary) to fund
deferred compensation plans for other employees (often top level
executives.) (Id. at 132-133.) It is possible such forms of
compensation would be any more likely to be disclosed under the
provisions of this bill than they would be under the SEC rules.
Thus, it does appear this measure will make improvements to
existing transparency provisions in the SEC rules. First, it
will provide the actual amounts (rather than estimates) of
compensation paid to the most highly compensated retirees. It
will also require that the most highly compensated executives
will be named, as retirees, in state SOS filings even after they
have left the company, whereas SEC filings only require
information on the pension plans provided to current executives.
In short, the requirements of this bill appear consistent with
current SEC rules, and will give shareholders, investors, and
the public more useful information without imposing any undue
burden on corporations.
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334
FN: 0004695