Worth Reading … SEC Proxy Disclosure Rules
The second wave of post-financial-crisis regulations (let’s not forget the elimination of broker discretionary voting that was effective Jan. 1) comes just in time for the 2010 proxy season when the SEC’s new enhanced proxy disclosure rules go into effect Feb. 28. While they won’t have the impact of “Say on Pay” or “Proxy Access,” these rules will prepare boards and management for issues that will most likely be addressed in further regulatory or legislative action.
The enhanced disclosure rules, which were approved on Dec. 16, 2009, focus on corporate governance and compensation matters. Specifically, they would require disclosures in the proxy and financial statements on:
• The relationship of a company’s compensation policies and practices to risk management.
• The background and qualifications of directors and nominees.
• Legal actions involving a company’s executive officers, directors and nominees.
• The consideration of diversity in the process by which candidates for director are considered for nomination.
• Board leadership structure and the board’s role in risk oversight.
• Stock and option awards to company executives and directors.
• Potential conflicts of interests of compensation consultants as well as the fees paid to consultants and their affiliates.
Additionally, the SEC on Jan. 20 issued a number of interpretative guidance on the new disclosures. You can go to the SEC page or check out Broc Romanek’s TheCorporateCounsel.net blog from Jan. 21. He has separate links to each Compliance Disclosure Interpretation (CDI).
As you could imagine, many law firms and blogs have offered their advice to boards on how to react to these new rules. The Conference Board Governance Center Director Notes series, The 2010 Proxy Season, will focus on the disclosure rules in the next couple of weeks. In the Director Notes article William Kelly, a partner at Davis Polk & Wardwell, and Mutya Fonte Harsch, an associate at the firm, write, “On the positive side, the reform can provide a platform for boards to present, in a reasoned and non-defensive manner, the thought process reflected in the company’s compensation and corporate governance practices.”
Among the client memos and blog posts I have read on this topic, Gibson, Dunn & Crutcher’s was one of the most thorough. In fact, the law firm had a Webcast briefing on Jan. 14 featuring the insights of four attorneys.
Steve Fackler, partner and co-chair of the firm’s executive compensation and employee benefits practice, says there are three questions most companies should answer in response to the new disclosure rules: “They are: ‘what should companies do to collect information (i.e. data collection and assembly of data)?’ ‘what should you be looking for’ and ‘what should companies actually disclose?’”
Two other areas that Gibson Dunn attorneys offered advice on are disclosures involving director qualifications and legal proceedings. “What is hardest for people is not just repeating what is someone’s biography…It’s important not to be too generic on this. They are looking for reasons people should vote for this director,” said Ron Mueller, a partner in Gibson Dunn’s securities regulation and corporate governance, corporate transactions and executive compensation and employee benefits practices. He emphasized how important it is not to bury such a disclosure in the proxy.
On legal proceedings, Gillian McPhee, of counsel with Gibson Dunn’s securities regulation and corporate governance practice, said it is important that as part of the new disclosures a company update its D&O questionnaires and revise its governance guidelines and committee charters.
Kelly and Harsch pointed out in Director Notes that “under the previous disclosure regime, companies were only expected to disclose determined violations of securities or commodities laws. The new rule expanded the requirement to alleged violations and settlements with government entities, but not to settlements of civil proceedings among private litigants.”
You can read Gibson Dunn’s thought leadership and Webcast slides by clicking here.
For more reading on the new disclosure rules, I would suggest looking at the following client memos, blog posts and articles:
• The New U.S. SEC “Proxy Enhancement Rules,” Eleanor Bloxham, The Corporate Governance Alliance Digest, Jan. 5, www.thevaluealliance.com/PDF/CGADigest010510.pdf. Key findings: Many boards are asking what the proxy disclosure enhancements approved by the SEC require, what questions they should be asking, and what issues they should be addressing now. Whether the enhancements have a beneficial impact will depend on the way issuers respond to the requirements, the SEC’s actions in terms of enforcement and investor or stakeholder reaction. The digest goes on to analyze the five key requirements, including suggested questions boards should be asking.
• Drafting Disclosure Relating to Board Leadership and Risk Oversight, Jeffrey Stein, Bill Baxley, King & Spalding partners, Harvard Law School Forum on Corporate Governance and Financial Regulation, Jan. 3, http://blogs.law.harvard.edu/corpgov/2010/01/03/drafting-disclosure-relating-to-board-leadership-and-risk-oversight/#more-6409. Key findings: Some observers suggested that the U.S. board leadership model (and specifically the failure of U.S. regulators to require an independent board chair) contributed to the crisis and to the failure of U.S. public companies to be prepared for the effects of the crisis. The authors went on to create a list of recommendations for boards preparing their 2010 proxy statements. They wrote: “Have the board thoughtfully review its current leadership structure, consider the sources of leadership, the lead director – responsibilities or contributions? consider how the model might change, one free bite at the apple [companies will be able to make changes in their board leadership structures, without having to expressly disclose that these changes have only been made recently], consider your audience (and word count), draw the connection to risk oversight, and get started early on the drafting.”
Others to consider:
What’s New for the 2010 Proxy Season, Shawna Fullerton Anderson, partner, Dorsey & Whitney LP, Jan. 12, www.dorsey.com/proxy_season_2010_corp_eupdate_anderson_jan10/.
SEC Approves Enhanced Proxy Disclosure Rules, Jones Day, Dec. 17, 2009, www.jonesday.com/newsknowledge/publicationdetail.aspx?publication=6931.
And your definition of board diversity is …, TK Kerstetter, Corporate Board Member Board Blog, Jan. 18. www.boardmember.com/ViewComments.aspx?post_id=4294967351
- Gary Larkin
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