In considering the “shape of things to come” — the theme that focuses this conference — one thing is certain: The regime regulating our financial markets is undergoing dramatic change. The case in point is the Dodd-Frank Act, which represents a historic expansion of the federal government’s power over the economy. The hundreds of rules and regulations that Dodd-Frank demands of the SEC and other financial regulators indicate just how far the government has reached into the private sector and just how heavy the government’s hand will be. Or, stated differently, the regulatory change demonstrates the degree to which government decision making, effectuated as it is through more regulation, will displace and distort private sector decision making.
To put it more directly, I have been and remain troubled that the Dodd-Frank regulatory regime goes too far. Without question, there is a fundamental role for government, including the SEC, in regulating our financial markets and our economy more generally; and we need a regulatory framework that is resilient and that fits our increasingly interconnected and complex financial system. None of us welcomes the kind of hardship and turmoil that the financial crisis wrought. The key question, therefore, is not whether we will or should have regulation. The answer to that question is straightforward: we will and we should. The real question is, “How much?”
When it comes to the question of “How much?”, I am concerned that the present wave of regulation will prove to be excessive, unduly burdening and restricting our financial system and suppressing private sector innovation, entrepreneurism, and competition at the expense of our country’s economic growth and global competitiveness. My concern that we are overregulating is accentuated when instead of evaluating each rule and regulation one-by-one, the totality of the regulation that the private sector must bear is added up. As regulatory mandates mount, I worry that the cumulative impact of the aggregation of rules and regulations will make it more difficult for companies to raise capital and to manage their risks effectively; will make it more costly for individuals to borrow when they need to; will stifle the cutting-edge innovation that we depend on to drive our economy forward; will leave investors with fewer valuable opportunities for building their wealth; and will undercut job creation.
All of which is to say that in thinking about the future, a great deal will turn on how financial regulators craft and implement the financial regulatory regime. The SEC, for example, still has many choices to make as the agency determines the scope and nature of securities regulation, whether it is pursuant to our rulemaking obligations under Dodd-Frank or otherwise. Notwithstanding how far-reaching the sweep of Dodd-Frank is, not everything on the Commission’s regulatory agenda flows from the legislation.
As the Commission continues fashioning the securities law regime, there will undoubtedly be disagreements over policy from time to time — over what shape the regime ought to take. Whatever the policy differences might be, however, there should be widespread agreement over this: That the agency’s decision-making process needs to be robust; that the Commission needs to be thorough and even-handed in assessing the potential consequences of our options; that we need to carefully evaluate whether the intended goals of our actions will be achieved; and that we need to identify and give due regard to the possible undesirable effects and unintended consequences of our choices. In other words, the SEC must engage in rigorous cost-benefit analysis — rooted in economics and the available data — when fashioning the securities law regime.
Simply put, by obligating us to justify our actions, cost-benefit analysis is an argument for regulatory decision making that fully accounts for both the good and the bad — that nets the costs against the benefits — to ensure that we have smart regulation that advances the SEC’s mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.
Accordingly, I am pleased that the SEC’s Division of Risk, Strategy, and Financial Innovation and Office of the General Counsel have worked together to develop new guidance for performing economic analysis in the agency’s rulemakings.  The guidance marks significant progress toward improving the analysis that underpins the Commission’s decisions. As the guidance itself puts it:
High-quality economic analysis is an essential part of SEC rulemaking. It ensures that decisions to propose and adopt rules are informed by the best available information about a rule’s likely economic consequences, and allows the Commission to meaningfully compare the proposed action with reasonable alternatives, including the alternative of not adopting a rule. The Commission has long recognized that a rule’s potential benefits and costs should be considered in making a reasoned determination that adopting a rule is in the public interest.
* * * *
The wide range of topics this conference is addressing reflects just how much is on your minds and remains unsettled. At least part of the changing regulatory landscape that companies and their investors are encountering stems from several new rules that the SEC has adopted over the past few years. The practical impact of these regulatory developments — including everything from new corporate governance disclosures; to affording shareholders an opportunity to propose proxy access bylaws; to instituting bounties for whistleblowers — will continue to play out. In addition, the SEC has announced that next month the Commission is scheduled to consider final rules regarding conflict minerals pursuant to Section 1502 of Dodd-Frank and regarding resource extraction pursuant to Section 1504 of Dodd-Frank, as well as rules required by the JOBS Act to eliminate the prohibition against general solicitation and general advertising in securities offerings under Rule 506 of Regulation D and Rule 144A.
Perhaps more than any other aspect of corporate governance, attention — and sometimes controversy — seems to center on how management gets paid and on the sums that executives take home. So, since I cannot cover everything, let me focus some additional thoughts on executive pay — something that Dodd-Frank addresses in several ways.
How executives are paid influences how they behave. Executive behavior reveals itself in how the company evaluates risk; in whether the management team is too timid or, by contrast, overconfident in pursuing new growth opportunities; in the extent to which innovation and entrepreneurism are rewarded; and in the extent to which the corporate culture emphasizes ethics, legal compliance, and personal responsibility.
As you know, among what Dodd-Frank provides for is a mix of SEC rulemakings addressing executive compensation. The Commission has already adopted final rules providing for so-called shareholder “say-on-pay”; for shareholder approval of certain golden parachutes; and for new compensation committee listing standards. Other Dodd-Frank rules are still to come. In particular, Dodd-Frank directs the agency to adopt rules regarding the clawback of incentive compensation that was awarded to executives based on “erroneous data,” as evidenced by a company’s financial restatement; and the Commission is obligated to adopt new disclosure requirements regarding (1) executive pay as compared to the firm’s financial performance, (2) the ratio of the median annual total compensation of the issuer’s employees (excluding the CEO) to the CEO’s annual total compensation, and (3) employee and director hedging of the value of the issuer’s stock.
With these provisions in mind — especially the clawback and the CEO pay ratio disclosure — I want to share three sets of observations that express some of my take on executive pay and on the considerations that I think should inform the policy judgments that will be made.
First, regulation needs to be workable in practice for those who have to comply with it. This seems to be a particular concern when it comes to the CEO pay ratio disclosure. Having to compile extensive data for their employees in the U.S., let alone around the globe, and then ensure that the data is standardized so that the ratio can be calculated would seem to present significant practical difficulties that could be quite costly for companies. In my view, due consideration will need to be given to alternative approaches to the rule that could advance the goal of providing investors with material information about CEO pay but in a way that does not impose excessive obligations on companies that yield little marginal benefit.
Second, to anticipate the consequences of any new regulation, one has to consider how the regulatory developments might affect the incentives of boards, senior executives, and shareholders. Some of the effects may be undesirable. For example, what steps might a company take to lower the multiple of the CEO’s pay as compared to the median compensation of the other employees? How, if at all, might an issuer’s efforts to manage the ratio impact how the business is structured and operated? Might a CEO come to believe that he is underpaid because the multiple of his compensation to the median employee compensation is lower for him than for his peers at other companies?
Let’s also consider Section 954 of Dodd-Frank, the clawback provision. Section 954 provides for the clawback of certain incentive compensation, including stock option awards. More specifically, the statutory provision requires companies that trade on an exchange to claw back incentive compensation from any current or former executive officer who erroneously received incentive compensation during the three years before the company is required to restate its financials, if such a restatement is required. In other words, an executive will have to pay back the difference between what the executive was paid and what he or she would have been paid had the company’s financial statements been accurate.
As a number of commentators have pointed out, Section 954 appears to operate as a “no-fault” provision — that is, Section 954 does not require that the restatement triggering the clawback be the result of any misconduct, which of course is to say that an individual may be required to forfeit some of his or her pay even if the executive committed no misdeed. By way of illustration, an executive who has worked diligently and honestly at a company that has robust financial controls and top-notch procedures and systems may nonetheless have to pay back a considerable portion of his or her compensation if the company has to restate because of an accounting error. I can understand why many might find this troubling.
Setting aside whether or not it is fair for the government to mandate clawbacks when there is no misconduct, Section 954 raises other possibilities that could prove to be problematic and not in the best interests of companies or their shareholders. For example, might compensation arrangements be restructured so that executives end up receiving less incentive pay that could be clawed back but larger discretionary bonuses that are not explicitly linked to specific financial targets? To what extent should we expect executives to press for higher base pay to compensate them upfront for the risk that the incentive compensation they do receive may have to be forfeited in the future? How might a shift from incentive-based pay toward more guaranteed pay impact an executive’s incentives? Might issuers be discouraged from restating to avoid triggering the Section 954 clawback? The unintended consequences could be costly.
Third, the optimal compensation structure depends on a host of facts and circumstances that are distinct to each executive at each company. Executive compensation does not lend itself to one-size-fits-all approaches, but instead demands a textured, company-by-company analysis. The countless characteristics that differentiate thousands of public companies from each other underscore the value of tailoring the internal affairs of each corporation — including the structure of executive compensation — to each enterprise’s own attributes and qualities, including its people, culture, and business strategy.
Not only is it important for regulators to recognize that one-size-fits-all governance and pay practices don’t work so well for most companies, but board members, officers, investors, and other corporate constituencies also should recognize that each company is unique. Proxy advisory firms should keep this in mind too given the understandable concern that has been raised that the recommendations of proxy advisory firms are too often based on a one-size-fits-all view of things. Indeed, given other concerns that have been expressed about proxy advisory firms — including that conflicts of interest may bias their recommendations and that their recommendations may be based on inaccurate information — it seems to me that the role of proxy advisory firms needs to be addressed. 
Given the significant realignment between the government and the private sector that Dodd-Frank occasions, it is no surprise that the regulatory change that Dodd-Frank commands has been the center of attention. But to appreciate the contours and consequences of the regulatory regime — to appreciate the shape of things to come — we cannot overlook key case law developments that influence what the law means and how it will be enforced.
In the interest of time, I simply want to observe the instrumental role that the U.S. Supreme Court has played in determining the reach and substance of securities regulation through its interpretations in recent years. Since the financial crisis, the Court has decided such cases as Merck (concerning the statute of limitations in private lawsuits for securities fraud), Morrison (concerning the extraterritorial reach of Section 10(b) of the ’34 Act), Matrixx (concerning materiality), Halliburton (concerning class certification), Janus (concerning what it means to “make” a misstatement or omission under Rule 10b-5), and Simmonds (concerning the statute of limitations for private actions under Section 16(b) of the ’34 Act). These Supreme Court cases add to earlier securities law opinions coming from the Roberts Court, including Tellabs (concerning the pleading of scienter in private actions alleging securities fraud) and Stoneridge (concerning primary liability under Section 10(b)).
Next term, the Supreme Court is set to hear Amgen v. Connecticut Retirement Plans and Trust Funds. Underscoring just how important the case law is, Amgen addresses what it takes for a group of plaintiffs seeking to bring a securities fraud class action to get the class certified.
* * * *
At bottom, the goal of good corporate governance is to promote good corporate decision making. Because companies are complex organizations, because the competition is fierce, and because you never have certainty or perfect information, making good decisions and then implementing them effectively is hard. Directors and officers make significant decisions on the basis of expectations realizing the chance that things could turn out poorly. This is the essence of the risk-reward tradeoff. It is also why it will come at a high cost to all of us if business ends up being too cautious and hesitant to invest. A dynamic and prosperous economy depends on the rewards that materialize when enterprises are willing and able to take the risks that spur innovation and propel growth.
What makes for an effective board? 
When evaluating boards, attention routinely focuses on board composition and structure. How many independent directors does a board have? What constitutes “independence”? Is the chairman of the board independent? If the chairman is not independent, is there an independent lead director? Are board elections competitive? Is the board staggered? What committees has the board constituted? How do the skills and experiences of the directors blend?
These are all appropriate inquiries. But what matters most is not how a board is composed or structured. What matters most is how directors act.
Boards of directors are expected to improve corporate decision making by spurring deliberation. In acting as a body, the promise is that boards will draw on the distinct perspectives, experiences, sensibilities, and expertise that different directors offer. The expectation is that as the group works through a range of ideas and arguments, the decision that is made will be better as a result of the directors’ collective efforts. As decision making improves, so should the company’s competitiveness and its ultimate performance.
The active engagement of directors is the lynchpin of meaningful deliberation. Decision making should improve when directors — whether interacting with each other or with management — engage in open and frank discussions, even if it means being critical and disagreeing. When assessing some course of action, directors should ask probing questions and follow-ups of each other and of management; should identify and challenge key assumptions; should offer competing analyses; and should develop competing options to ensure that alternatives are considered and not cast aside too readily.
Put differently, directors should be willing to dissent, and disagreement from others should not be discouraged or suppressed. When it leads people to engage rigorously, disagreement helps ensure that the unknown is identified; that potential conflicts are spotted; that information is uncovered; that overconfidence and other biases are managed; that “outside the box” thinking is sparked; and that challenges and opportunities are assessed in a more balanced way. More to the point, directors cannot become complacent or too deferential to management just because the CEO has been making the right calls and the company has been on a good run. Whether the company is successful or struggling, the tough questions need to be asked to help ensure that the best decisions are made going forward. Indeed, a board may want to consider designating one or two directors, perhaps on a rotating basis, whose explicit charge it is to be skeptical and to press when needed.
In one of my favorite quotes, Peter Drucker, the influential management consultant and professor, expressed a similar sentiment this way:
Decisions of the kind the executive has to make are not made well by acclamation. They are made well only if based on the clash of conflicting views, the dialogue between different points of view, the choice between different judgments. The first rule in decision-making is that one does not make a decision unless there is disagreement. 
There is a word of caution, however. Disagreement and spirited deliberation should not give way to hostility. Distrust and disharmony can threaten an enterprise; boards need collegiality and cooperation and a well-functioning relationship with management. Dissent will be most constructive, then, when conflicting viewpoints and pointed resistance do not trigger defensiveness, but instead are encouraged by board members and the CEO alike as the way to reach better decisions.
 See Current Guidance on Economic Analysis in SEC Rulemaking, available at http://www.sec.gov/divisions/riskfin/rsfi_guidance_econ_analy_secrulemaking.pdf; see also Mary L. Schapiro, Chairman, Securities & Exchange Commission, Testimony Concerning Economic Analysis in SEC Rulemaking, Before the Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs of the Committee on Oversight and Government Reform, U.S. House of Representatives (April 17, 2012), available at http://sec.gov/news/testimony/2012/ts041712mls.htm.
 For a discussion of the proxy advisory firm industry, see, e.g., Section V.A of the Commission’s Concept Release on the U.S. Proxy System, available at http://sec.gov/rules/concept/2010/34-62495.pdf.
 Cf. Peter F. Drucker, The Effective Executive (1966).
 Id. at 148. See generally Cass R. Sunstein, Why Societies Need Dissent (2003).