Thursday, December 17, 2009

A Holiday Present from the SEC - New Proxy Disclosure Rules!


The Securities and Exchange Commission (SEC) voted 4-to-1 yesterday to approve revisions to the proxy disclosure requirements for publicly-traded organizations. With only minor revisions to the proposed changes presented back in July, these new requirements apply to companies filing proxies on or after February 28, 2010. Companies with fiscal years ending on or after December 20, 2009 and a proxy filed on or after February 28, 2010 will need to begin preparations to meet these new requirements. A summary of key provisions is presented below.

Compensation Risk Disclosure Going forward, companies will be required to discuss compensation policies and practices for all employees if such policies and practices create excessive risk. The rule was modified from the original proposal for a disclosure requirement on all policies and practices which “may have a material effect” be disclosed to one in which only policies and practices “reasonably likely to have a material adverse effect” need be disclosed and discussed. The “reasonably likely” disclosure threshold parallels the requirement applied to the discussion of risk material to the business in your 10-K filing. A few things of note related to the risk disclosure:
  • The disclosure will not be placed in the CD&A as originally proposed, but should be presented as a separate item in a company’s executive compensation disclosure.
    The disclosure assumes that an analysis/assessment of compensation risk has been undertaken by the company.
  • The requirement builds upon, and expands, the original requirement placed on TARP participants in the spring of 2009 for such an assessment to be conducted with respect to compensation for Senior Executive Officers.
  • Smaller reporting companies will not be required to provide this disclosure.
  • The SEC provided the following five examples of the type of policies and practices that could trigger disclosure. Careful attention should be paid to compensation policies and practices:
  1. At a business unit of the company that carries a significant portion of the company’s risk profile;
  2. At a business unit with compensation structured significantly differently than other units within the company;
  3. At a business unit that is significantly more profitable than others within the company;
  4. At a business unit where the compensation expense is a significant percentage of the unit’s revenues; and
  5. That vary significantly from the overall risk and reward structure of the company, such as when bonuses are awarded upon accomplishment of a task, while the income and risk to the company from the task extend over a significantly longer period of time.
Modifications to the Reporting of Equity Compensation – One of the more debated requirements in the disclosure rules implemented in August 2006 was the manner in which equity compensation was required to be presented. In 2006, the SEC required companies to disclose the annual expense of equity for the year applicable to the year of cash compensation disclosure. Because most awards vest over a period of multiple years, and expense is distributed throughout the vesting period, a single year’s expense attribution often represented multiple years of grants. Adding to the confusion was the requirement that performance awards be reported at the amounts payable for maximum performance, a scenario that was rarely achieved over the past two years.
The SEC attempted to address both of these issues with the new requirements. Under the new rules, companies will be required to report stock and option awards in the Summary and the Director Compensation Tables as the aggregate grant date fair value of the award. This is a return to the manner in which equity compensation was disclosed prior to August 2006.
In addition, performance-based awards will now be reported on the basis of the most probable outcome of the performance requirement, not the maximum possible (unless of course the maximum happens to be the most probable outcome). The determination should be made on the date of the grant and should parallel the number of options/shares/units accounted for when determining the expense of the award for accounting purposes.
Additional considerations to keep in mind regarding equity compensation disclosure:

  • Values of equity awards will need to be recalculated for the prior years when presenting the three-year history of compensation in the Summary Compensation Table (SCT).
  • Although the equity values will need to be recalculated, a re-examination and identification of Named Executive Officers (NEOs) for those prior years will not be required and may stay the same.
  • Due to the changes in the reporting of equity awards, companies with large one-time awards to officers (such as a new-hire award, promotional award, or bonus award) should be careful when identifying the NEOs for 2009. This also applies to companies with an award schedule involving large awards granted every third year rather than ongoing annual awards. Such a schedule would impact the determination of NEOs and provide greater variability in NEO identification from year-to-year.
  • Although the requirement for disclosing the value of performance awards is based on the most probable outcome, companies will still need to provide information on the maximum value in footnotes to the SCT if that probable outcome is below maximum opportunity.
Independence of Compensation Consultants The SEC provided more detailed guidance on issues of concern with respect to the independence of compensation consultants and potential conflicts of interest. Companies will now be required to provide detailed information regarding the compensation consultant if the following is true:
  • If a compensation consultant engaged by the Board or Compensation Committee provides additional services (either directly or via an affiliate) to the company in an amount greater than $120,000 during the fiscal year.
  • If a compensation consultant (and affiliate) engaged by the company provides executive compensation consulting services and additional services to the company in an amount greater than $120,000 during the fiscal year.
  • The compensation consultant engaged by the company is excluded from this requirement should the Board and/or Compensation Committee retain its own non-affiliated compensation consultant.
  • Services involving broad-based non-discriminatory plans or the provision of information, such as a general industry compensation benchmarking, will not be treated as "executive compensation consulting services" for application of this requirement.
Should disclosure be required, the fees should be disclosed along with details on whether the decision to engage the consultant (and/or affiliate) to conduct non-compensation related work was made or recommended by management. The disclosure should also comment on any board approval connected to the decision.

Expanded Disclosure on Directors – The new requirements address three issues related to individuals serving in the Board; qualifications, diversity and history of other board service. Companies will need to provide details regarding the experience, qualifications, attributes and skills taken into consideration when selecting an individual to serve on the Board. These requirements cover both current sitting directors and those up for nomination at the time of the filing. Note that this same disclosure is required in the proxy soliciting materials submitted with respect to any nominee for director put forward by another proponent outside of the Board’s Nominating Committee.
With respect to diversity, companies will need to disclose whether the nominating committee considers this factor and how it is taken into account when selecting nominees. Companies will be required to disclose if a formal policy is in place for the consideration of diversity and how this policy is implemented. The SEC refrained from providing an operational definition of diversity, leaving this endeavor to the filer.
Beyond the service provided by the director to the filer, the Company must also disclose directorships held by individual board members on the boards of other public and registered investment companies. This requirement covers a five-year historical timeframe and applies even if the external directorship is no longer held. Certain legal proceedings and securities fraud enforcement actions levied against a director within the last 10 years must also be disclosed.

Board Leadership Structure – Companies must discuss their current board leadership structure and why this structure is the appropriate one for the organization. The following items should be included in the discussion.
  • Is the CEO and Chairman role held by the same individual or by different individuals? Why was this structure chosen?
  • If the Board Chair and Principle Executive Officer roles are combined, and a lead independent director is designated to chair meetings of independent directors, why was this structure chosen? What is the specific role of the lead independent director in the leadership of the company?
Board Oversight of Risk – In consideration of the importance of risk management and the variety of risks facing companies (e.g., credit risk, liquidity risk, and operational risk) the SEC is requiring further disclosure on the role the Board performs in the oversight of risk management. Companies should include in this disclosure the procedures and process by which the Board receives information on risk issues from senior management and the various risk management functions in the organization.

Timing of the Reporting on Shareholder Voting Results – Previously, shareholder voting results were required to be reported in the subsequent 10-Q or 10-K filings. This requirement at times resulted in a delay of months between the date of the shareholder meeting and the reporting of voting results. In consideration of the need for timeliness of such votes, the SEC changed this requirement to one requiring the results to be disclosed in 8-K filings to be made available within four business days after the conclusion of the meeting in which the vote was held. Should final results be unavailable on that date, the company must file preliminary voting results.

Contact CompWiser Consulting
CompWiser provides a full suite of compensation consulting and related services. In addition to the list of standard services, we can assist with a variety of custom projects. Visit
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For additional information, further questions, or to receive a custom proposal for consulting services including assistance with your company’s annual proxy filing please contact:

CompWiser Consulting, LLC

P.O. Box 14306
San Francisco, CA 94114

phone: 415.894.5556

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