At its December 16, 2009 open meeting, the Securities and Exchange Commission (SEC) voted 4-1 to approve certain rule amendments, which will become effective on February 28, 2010, in time for the 2010 proxy season. The amendments will require:
Enhanced Corporate Governance Disclosure
Director and Nominee Qualifications. Companies will be required to disclose the particular experience, qualifications, attributes or skills that led their boards to conclude that each of their directors and director nominees are qualified to serve as board members. The amendment requires annual disclosure for each director, even those not up for election.
In addition, the amendment imposes longer look-back periods for disclosure of other directorships (five years) and legal proceedings (ten years), with an expansion of the types of legal proceedings requiring disclosure.
Board Diversity. The rules will require companies to disclose whether, and if so, how, the nominating committee considers diversity in identifying nominees for director. If the nominating committee (or the board) has a policy regarding board diversity, the company must describe how the nominating committee implements and assesses the effectiveness of the policy. The SEC noted in its release that the rules do not define “diversity.” Each company may define diversity as it deems appropriate, and may consider a number of factors, such as professional experience, education, race, gender or national origin.
Board Leadership Structure and Role in Risk Oversight. Companies will be required to provide shareholders with disclosure of, and the reasons for, the leadership structure of the board, including whether and why a company has chosen to combine or separate the CEO and Chairman positions, and whether and why a company has a lead independent director.
The rules also require a description in the proxy statement of the board’s role in company risk oversight and how it administers its risk oversight function, such as through a separate risk committee, the audit committee or the full board.
Accelerated Reporting of Voting Results on Form 8-K. The new rules will shift disclosure of shareholder voting results from periodic filings to Form 8-K, which must be filed within four business days of a shareholder meeting. If final voting results are not available within four business days, a company must report preliminary results on Form 8-K and file an amended Form 8-K within four business days of determining the final voting results.
Enhanced Compensation Disclosure
Narrative Disclosure of the Company’s Compensation Policies and Practices as They Relate to Risk Management. The amendments will require companies to address their compensation policies and practices for all employees in the proxy statement if these policies and practices create risks that are reasonably likely to have a material adverse effect on the company. The SEC has suggested that, when assessing whether disclosure is required, companies should consider their compensation policies and practices:
- At a business unit of the company that carries a significant portion of the company’s risk profile.
- At a business unit with compensation structured significantly differently than other units within the company.
- At a business unit that is significantly more profitable than others within the company.
- At a business unit where compensation expense is a significant percentage of the unit’s revenues.
- That vary significantly from the overall risk and reward structure of the company, such as when bonuses are awarded upon the accomplishment of a task, while the income and risk to the company extend over a significantly longer period of time.
The new disclosure is required in a separate section of the proxy statement and will not be part of the Compensation Discussion and Analysis. Companies will not be required to make an affirmative statement that their compensation policies and practices are not reasonably likely to have a material adverse effect on the company. This new disclosure requirement does not apply to smaller reporting companies.
Compensation Consultant Conflicts of Interest. If a company uses a consultant for services relating to executive or director compensation and also uses the consultant (or an affiliate) for other services exceeding $120,000 during the company’s fiscal year, all fees paid to the consultant must be disclosed in the proxy statement. Other disclosure regarding the engagement may also be required. The “other services” may include those related to benefits administration, human resources consulting or actuarial services.
Revision to Compensation Tables. Adopting the reporting method originally proposed by the SEC in August 2006, the new rules will require companies to revise their Summary Compensation and Director Compensation Tables to report the value of stock and option awards made during the fiscal year based on their aggregate grant date fair value, as determined in accordance with FASB ASC Topic 718 (formerly FAS 123(R)). Currently, the rules require companies to report the dollar amount recognized as an expense for financial statement reporting purposes for the fiscal year. The value to be reported for performance-based stock and option awards should be the value at the grant date based on the probable outcome of the performance condition, assessed as of the grant date of the awards. The maximum potential value must appear in a footnote. Companies will be required to present recomputed disclosure for each preceding fiscal year included in the compensation tables.
Public companies should consider the following actions in light of these recent developments:
- Revise your proxy season calendar to include reporting of shareholder voting results on Form 8-K and to allow for sufficient time for management and the board to make the additional evaluations and draft the new disclosures required under the amendments.
- Revise director and officer questionnaires to gather additional information about past legal proceedings and directorships, as well as information about directors’ qualifications, skills and experience. Determine whose “conclusions” regarding the directors’ and nominees’ qualifications will be discussed in the proxy statement.
- Determine whether to adopt a diversity policy for directors if the company has not already done so. If such a policy is in place, the nominating committee should evaluate the effectiveness and implementation of the policy.
- Evaluate the board’s current leadership structure and plan the related disclosure. If the company has not separated the CEO and Chairman roles, the company will also need to disclose whether and why it has a lead independent director and what role such person plays in the leadership of the company.
- Review compensation policies and practices for both executive officers and employees and determine the impact on the company’s overall risk profile.
- Identify the services provided by compensation consultants and the company’s existing policies and practices regarding the retention of compensation consultants. Determine whether and what policies should be implemented to approve and monitor additional services provided by compensation consultants to avoid potential conflicts of interest.
- Recalculate amounts in your compensation tables based on the aggregate grant date fair value of stock and option awards.
If you have questions or need additional information please contact:
R. Douglas Harmon
John C. Jaye
Charles Anderson, Jr.
J. Carlton Fleming, Jr.