SEC Proposes Measures Related to Corporate Governance
On July 1, 2009 the Securities and Exchange Commission (SEC) proposed regulations related to the disclosure provided to shareholders of public companies in connection with compensation and corporate governance matters. These proposed regulations would require public reporting companies to include in proxy statements and information statements additional disclosure relating to:
- the relationship of a company’s overall compensation policies to risk,
- the qualifications of directors, executive officers and nominees,
- company leadership structure,
- potential conflicts of interest of compensation consultants, and
- expanded reporting of stock options and stock option awards to company executives and directors.
The proposed regulations would also accelerate the reporting of director election results to four business days after their election.
Although the SEC has not yet issued the proposing release, the presentation by the Division of Corporation Finance to the SEC Commissioners outlined the following proposed changes:
- Expanding the compensation discussion and analysis disclosure requirements to include a discussion and analysis of overall actual compensation practices for employees generally, including non-executive officers, if the risks arising from those compensation policies or practices may have a material effect on the company.
- Revising the disclosures in the summary compensation table and in the director compensation table of the aggregate grant date fair value of stock and option awards, computed in accordance with Statement of Financial Accounting Standards No. 123R (FAS 123R) rather than dollar amount recognized for financial reporting purposes under FAS 123R with respect to the fiscal year in which the stock or option was awarded.
- Expanding the disclosure requirements regarding the qualifications of directors and nominees. The proposed amendments would require companies to disclose for each director and any nominee for director the particular experience, qualifications, attributes or skills that qualify that person to serve as a director of the company and as a member of any committee on which the person serves, in light of the company’s business. Currently all that is required is a five year employment history of each director and nominee intended to enable shareholders to reach their own conclusion as to the qualification of the director or nominee. In addition, the proposal would require disclosure of public company directorships by each of such persons during the past five years rather than only currently held directorships and a lengthening of the time for which disclosure of material legal proceedings in which such persons are involved is required from five years to ten years.
- Additional disclosure of the company’s leadership structure and a discussion of why the company believes its leadership structure is the best structure for the company. Companies would be required to disclose whether and why they have chosen to combine or separate the Chief Executive Officer and Board chair positions and whether the company has a lead independent director. In addition, the proposal would require additional disclosure concerning the role of the board of directors in the company’s risk management process and the effect, if any, that this role has on the manner in which the company has organized its leadership structure.
- Additional disclosure on the fees and services of compensation consultants and their affiliates if a compensation consultant provides consulting services relating to executive or director compensation and also provides additional services to the company. The proposed amendments would require disclosure of the additional services and the aggregate fees paid for all additional services as well as the aggregate fees paid for work related to executive and director compensation consulting, whether the decision to engage the consultant for other services was recommended or made by management and whether the board of directors or the compensation committee has approved the other services.
- Reporting the results of director elections on a Current Report on Form 8-K due within 4 business days of the meeting rather than on the Form 10-Q or Form 10-K for the fiscal period in which the meeting took place (which could be 45 days or more after the meeting).
If adopted as outlined, these proposals will require modification of existing officer and director questionnaires and significant changes in proxy statement disclosure. We intend to prepare a further Advisory once the SEC takes final action on these proposals.