COMPENSATION IN CONTEXT
July 16, 2009
The SEC Proposes Revisions to Proxy Disclosure of Executive
Compensation
On
July 10, the United States Securities and Exchange Commission (SEC)
released a proposal to make several revisions to the manner in which
executive compensation is disclosed in a public company’s annual proxy,
and related matters. If adopted, the revisions would apply to the 2010
proxy season.
For
the most part, the proposed revisions represent fine-tuning of the
comprehensive revision of the compensation disclosure requirements
adopted by the SEC in 2006. They also contain new disclosure
requirements that
reflect public perception surrounding the causes of the current
financial crisis—particularly the perception that incentive policies
focused on
short-term results have encouraged excessive risk-taking. This issue of
Compensation in Context outlines some of the principal revisions
proposed by the SEC, which include:
Disclosure of Effect of Compensation Practices on
Risk
The
SEC has proposed an addition to the Compensation Discussion &
Analysis
(CD&A) section of the proxy discussing the manner in which the
company’s overall compensation policies can create incentives for
employees that
affect the company’s risks, and the procedures the company has in place
to manage such risks. This section of the CD&A would not be limited
to
the five most highly compensated officers, but would require a
discussion of the manner in which bonus and other compensation plans
and policies may
create incentives for all employees to cause the company to
engage in risky behavior that could have a material effect on the
company. The
proposal contains a number of specific issues that may need to be
addressed in this section, including the extent to which the company
has implemented
policies to offset the tendency of incentive plans to reward short-term
risk taking behavior, such as clawbacks and mandatory bonus
deferrals.
Additional Disclosure About Directors and
Nominees
The
proposal would require that a proxy discuss the qualifications of
directors
and nominees for positions on the board of directors, with specific
reference to the relevance of the director’s or nominee’s
qualifications to the business of the company. The proposal would also
require disclosure of all other board memberships held by each director
or
nominee during the prior five years (right now, only current
memberships need be disclosed), and would expand the requirement to
disclose legal
proceedings in which directors and nominees (and executive officers)
have been involved from the prior five years to 10 years.
Discussion of Leadership Structure
The
proposal would require a discussion of the company’s leadership
structure and the philosophy behind the structure. Most notably, this
would require companies to explain why the company has chosen to
combine (or
separate) the roles of chairman and CEO. The proxy would also be
required to describe the role of the board of directors in the
company’s risk
management.
Disclosure of Services Performed by Compensation
Consultants
The
proposal would require the company to disclose whether any other
services
have been performed for the company by compensation consultants and, if
so, the amount of fees paid for such services. Although the SEC
proposal would
only require disclosure, Treasury Secretary Geithner has suggested that
the administration may introduce legislation that would actually
prohibit
compensation consultants from performing other services for the
company, reflecting a perception that compensation consultants who
receive other
business from the company have a conflict of interest that may cause
them to recommend excessive compensation for senior
management.
Reporting of Stock and Option Grant Value
Reversing
a last-minute decision made when the current compensation disclosure
rules were finalized in 2006, the new proposal would require that the
total fair value of stock and option awards as of the grant date be
included in
the Summary Compensation Table. At present the Summary Compensation
Table includes the amount of compensation expense that the company must
recognize
each year under generally accepted accounting principles. The SEC
explained that the total fair value as of the grant date is a more
meaningful figure
in evaluating an executive’s total compensation. In addition, the
current market crisis has caused the amount of income recognized on an
annual
basis to be negative in years following the year of the original grant,
which the SEC believes unrealistically reduces an executive’s total
reported compensation. To avoid duplication, the total fair value of
grants will be deleted from the Grants of Plan-Based Awards
table.
Accelerated Reporting of Shareholder Votes
Under
the proposal, the result of shareholder votes would be reported on a
Form
8-K, which generally must be filed within four business days of the
shareholders meeting. Currently, the results of shareholder votes do
not need to
be reported until the company’s next quarterly (10-Q) or annual (10-K)
report.
Changes in Proxy Solicitation Rules
The
SEC has also proposed changes to the rules governing the proxy
solicitation
process, specifically the circumstances in which a person communicating
with shareholders must comply with the disclosure requirements
applicable to a
proxy solicitation. These changes would generally facilitate actions by
minority shareholders and shareholder activists, including “just say
no” campaigns in which a shareholder urges other shareholders to
withhold votes in favor of management proposals. The new rules would
also
codify recent SEC guidance by facilitating “short slate” proxy
solicitations, in which the person soliciting the proxy does so in
order
to vote for one or two specific candidates for the board, but also
receives the discretion to vote for other board candidates (whether
company
nominees or other shareholder nominees) not listed in that person’s
solicitation.
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Veritas Executive Compensation Consultants,
LLC. (“Veritas”) is a truly independent executive compensation consulting firm.
We
are independently owned, and have no entangling
relationships that create potential conflict of interest scenarios, may
attract the unwanted scrutiny of regulators, shareholders or the media,
or
create public outcry.
Veritas also
believes that public company Boards
of Directors and shareholders deserve higher standards of disclosure
that verify the independence of the executive compensation advice that
their
companies receive from their consulting firms. This disclosure will
assist in curing the terribly negative views that shareholders,
employees,
the media, and the American public have on executive pay.
Veritas goes
above and beyond to provide
unbiased executive compensation counsel. Since we are independently
owned, we do our job with utmost objectivity - without any entangling
business
relationships.
Following
stringent best practice guidelines, Veritas
works directly with boards and compensation committees, while
maintaining outstanding levels of appropriate communication with senior
management.
Veritas promises no compromises in
presenting the innovative solutions at your command in the complicated arena of executive compensation.
We deliver the advice that you need to hear, with
unprecedented levels of responsive client service and attention.
Visit us online at www.veritasecc.com, or contact our CEO Frank
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