On Tuesday, March 12, the Senate Banking Committee will begin review of the nomination of Mary Jo White to be chair of the Securities and Exchange Committee. The Committee should probe deeply on whether she will be a watchdog or a lap dog for Wall Street. One clear test is her position on the rules for publishing CEO compensation and CEO to worker pay ratios which the SEC has been sitting on for the nearly three years since the passage of the Dodd-Frank financial reform legislation.
White is touted as a former tough prosecutor with the ability to police Wall Street. She is at the top of her profession, with extraordinary experience both as a prosecutor and as a leading corporate defense attorney in a white shoe Wall Street defense firm. And it is this very experience that raises questions as to whether she can and will do the job.
She and her husband, John White, are pristine examples about how to cash in on the revolving door between government service and private practice. After serving as a public prosecutor, White made millions defending top Wall Street banks and major companies at Debevoise and Plimpton. Recent clients included JPMorgan Chase on cases arising form the financial crisis, News Corp over its phone hacking, former Bank of America CEO Ken Lewis on the shady parts of the bank's takeover of Merrill Lynch. Not surprisingly, Jamie Dimon, the head of JP Morgan Chase, has hailed her as the "perfect choice" to head the SEC. Exactly the kind of endorsement that should rouse the suspicions of the citizens and senators alike.
If she recuses herself from any matter concerning her former clients, what is left? As a defense attorney for the big banks, she knows where the bodies are buried. Is she able and willing to use that information? Her husband has been lobbying against the Dodd Frank regulations. Is she willing to spurn his arguments? Or is her nomination a most perverse expression of the "regulatory capture" that has rendered the SEC and other financial regulatory agencies toothless?
This should be of particular concern now that Attorney General Holder has publicly admitted that the Department of Justice considers big banks too big to jail. White, no doubt, has helped to construct that pernicious argument as a defense attorney over the last years. Is she willing to repudiate that posture in her new role?
Given the SEC's weakness over the last years, there are many questions to pose to White in her confirmation hearing, from the dilution of the so-called Volker rule to the SEC's failure to go after banks and bankers for the "epidemic of fraud" that helped blow up the economy.
The Boss and the Worker
One central test is whether White will commit to issue the rules governing disclosure of CEO compensation, particularly section 953(b) of the Dodd Frank Act. This section requires publicly held companies to disclose annually the total compensation of their CEO, as well as the ratio of his or her pay to the median compensation of the companies' workers across the globe.
Needless to say, a horde of bank and corporate lobbyists mobilized to overturn the provision, and failing that, to muck up the SEC rule making, including the big guns of the Securities Industry and Financial Markets Association, the National Association of Real Estate Investment Trusts, and the U.S. Chamber of Commerce. The regulations, promised over a year ago, are still buried in the bowels of the SEC.
This is a big deal, as testified by the millions spent on lobbying against it. CEO pay surged after 1980 when BusinessWeek estimated it was 42 times that of the pay of factory workers. By 2010, CEOs at big companies were pocketing 343 times that of the typical worker, according to the AFL-CIO. Corporate profits are at record levels; worker pay at record lows as a percentage of the economy. The top 1 percent -- made up significantly of top corporate and bank executives -- captured 121 percent of the nation's income growth in the first two years coming out of the recession. The remaining 99 percent lost ground on average.
The white shoe law firms and Gucci-clad lobbyists argue that figuring out the ratio is too complicated and costly for companies and that publishing it means nothing to investors or customers. Somehow the sophisticated quants can develop algorithms for nanosecond trading but can't figure out the ratio of CEO compensation to that of workers. This, of course, is total nonsense. Once the SEC publishes the rule governing what to report, any company with a computer and a payroll can produce it quickly.
And the information is of deep concern to investors and to customers. Legendary management guru Peter Drucker suggested the "Drucker principle" that CEO compensation should not exceed worker pay by more than 20 or 25 to one. If it went beyond that, Drucker argued, it destroyed morale and team spirit, particularly among middle management -- with deleterious consequences for the company.
Worse, current CEO compensation packages -- as detailed by Lucian Bebchuk and Roger Martin -- feature stock options and bonuses that give CEOs multi-million dollar personal incentives to focus on short-term returns rather than the long-term growth of the company. They gut needed investments and pursue strategies meet short-term profit expectations -- shipping jobs abroad, taking on debt, selling off and plundering their own companies. They pocket their bonuses and are gone in a few years.
Needless to say, investors have a deep stake and interest in this. And increasingly companies like Whole Foods are discovering that a sensible CEO to worker pay package, like a commitment to the environment, helps attract customers.
The Popular Revolt
In Europe, the revolt against bloated CEO pay -- often viewed as a noxious American import -- has already started. The very sober and bourgeois Swiss have just passed a referendum adding to their constitution a ban on golden handshakes and parachutes (pay bonuses for joining a company or leaving it), while making CEO compensation subject to shareholder veto. In February, the European Union agreed to cap bankers' bonuses broadly at a year's salary, with the proviso that the bonus could be doubled subject to majority shareholder approval. In the U.S., companies like Citibank have been shocked to find shareholders voting in large numbers against executive pay packages in advisory "say on pay votes."
The CEO pay provisions in Dodd Frank simply make information about CEO compensation and its ratio to worker pay available to investors and customers. It is astounding that this information isn't already routinely and readily revealed. And it is an clear measure of how compromised the SEC has been that intense bank and corporate lobbying has thusfar deep-sixed the regulations. So one test for Mary Jo White is whether she is prepared to make a clear promise to make publication of these regulations one of her first priorities if her nomination is confirmed.
Hearings on SEC nominations tend to be sleepy affairs. But after Wall Street's excesses blew up the economy and drove us into the Great Recession, Americans want the bankers and the big banks held accountable. That requires fierce, independent and fearless regulators. And that requires senators will to break from business as usual and grill the nominee as to her background, her conflicts of interest, her willingness to crack down on former clients, and her commitment to issue the rules demanded in law by the Congress. This hearing should not be a walk in the park.
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