Boards of Directors and management face numerous challenges in 2011. First and foremost is planning for recovery and growth amidst an improving, but still fragile, U.S. and global economy. Another significant challenge will be assessing and implementing the new regulatory mandates imposed by Congress, the SEC and the stock exchanges.
Accomplishing both of these goals while addressing day-to-day business challenges and the demands of various corporate constituencies will require more time and resources than many executives and boards have anticipated.
While specific rules and proxy drafting will consume most of our time, there are some broader themes that will be important in 2011 and beyond.
- Remember the Goal: When besieged by the myriad of regulatory mandates facing us in 2011, it is natural to forge checklists and action items to manage the implementation process. Don't let the checklists and the other mechanics of compliance obscure the goal. Good corporate compliance means that the policies and procedures are tailored to fit your company and its culture. In the end, properly tailored compliance policies should advance your goals of corporate integrity and sustained growth for stockholders.
- Prime the Pump: The Board of Directors and its committees will need to take an active role in implementing the new regulatory mandates. This is especially true for the Compensation Committee. Manage expectations through appropriate updates and director education. Board and committee agendas will need to be carefully planned to allocate appropriate time to the new compliance matters.
- Risk Management is Here to Stay: The SEC and stockholder activists expect risk management to be dynamic. As executive compensation practices evolve, companies will need to update and refresh their evaluation and disclosure of risk management. As economic recovery leads to new opportunities for your company, a thorough and continuous evaluation of corresponding risks must be performed and properly reported.
- Enhance Communication: Many of the new regulatory mandates will necessitate increased communication with your stockholders and other constituencies. While implementation of the SEC's new proxy access rules is currently on hold pending the outcome of litigation, we believe that some form of proxy access will survive. Now is the time to develop procedures for monitoring your stockholder base and communication strategies for engaging with your stockholders. Strong communication now will minimize future issues. Once a director nomination campaign is threatened or launched, it may already be too late for constructive dialogue.
Get Ready for Say on Pay: Five Disclosure Changes to Consider
- Executive Summary for Your CD&A: Assume that stockholders and institutional investors and advisors will not read the entire executive compensation section of your proxy. Sell your compensation program in the Executive Summary.
- Make it More Readable: Use graphics, tables and other layout enhancements to deliver your data, analyses and message more effectively.
- Trade "What" for "Why": Move extensive factual disclosure from the CD&A to tables or narratives to tables. Replace it with the "why" - the "Analysis" in the CD&A.
- Tackle the Issues Head On: Highlight compensation "best practices." Tackle controversial compensation practices head on and explain why they work for your company.
- Pay vs. Performance: Detailed disclosure of pay vs. performance and internal pay equity is coming in 2012. Consider how you will address that disclosure and lay the groundwork in your CD&A this year.
For more information on reaching your business goals in 2011, please contact:
R. Douglas Harmon
John C. Jaye