Corporate governance or regulation? That is the question

That is the question on the mind of Troy Paredes, one of the five members of the US Securities and Exchange Commission. In a speech to a meeting of the Transatlantic Corporate Governance Dialogue in Brussels, Paredes took a tone that his audience might have found unusual coming from a US official – humility. "Throughout the financial crisis itself, there was a great deal of uncertainty as to how the law would be applied and as to the nature and extent of the U.S. government's potential intervention. To me, all of this means that we must approach our regulatory responsibilities with humility, appreciating the complexity of the challenges before us," he said. The SEC would need to strike appropriate balances in exercising the discretion the SEC was given in the Dodd-Frank Act on financial regulation. That law was, in several ways, the biggest change in corporate governance as well as financial regulation since the 1930s. Humility, he said, involved three actions:

• Knowing the options: The SEC will need to hear the "full range of ideas and perspectives" before deciding what specific steps to take in implementing the law. What are the practical consequences, the costs and benefits?
  
• Data: Decisions should be supported by facts. The report on the May 6 "flash crash" was useful in understanding how financial markets had developed. Sometimes the data point to counterintuitive answers.
  
• Discretion: The SEC has options under Dodd-Frank to conduct incremental rather than radical change. "Proceeding with such caution – namely, taking some regulatory steps now while deferring others until we can assess how the private sector has adjusted – allows for a more efficient and better calibrated regulatory regime to develop over time, having been grounded in the learning of experience and our consideration of the market’s adaptations," he said.

Some of that discretion applies to how the SEC implements measures on the core corporate governance agenda: giving shareholders a "say on pay": how frequently should such an advisory vote on remuneration be? How should the SEC define the independence of members of compensation committee? How does it go about setting the ratio of medium employee pay to that of the CEO? These are areas where board discretion is eroded by regulatory discretion, and Paredes isn't sure how far the SEC should go into that realm: "a chief purpose behind the Dodd-Frank executive compensation provisions is to dissuade companies from taking excessive risks," he said. "While lawmakers should acknowledge the prospect of excessive risk taking, we also must recognize that companies can take too few risks."

And then there's that little matter of the election. His comments noted how the SEC's structure and mandate sought to make it independent of party politics, even if the President named the commissioners and by convention could secure a majority from his party. What Paredes didn't discuss was Congress. With control likely to shift to the Republicans after the November 2 elections, will the Dodd-Frank Act remain intact and in need of implementation?

Source document: The Paredes speech gives further insights into his thinking on boards of directors, too.