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Required Reading: How the SEC Proposes to Change Proxy Disclosure

The Securities and Exchange Commission (SEC) recently finalized new rules for proxy disclosure and solicitation enhancements that demand the attention of all public companies. These rules are intended to improve disclosures to shareholders in annual reports, proxy and information statements, and registration statements about such topics as compensation, risk and leadership qualifications and structure. 

Follow the money
Perhaps of greatest interest to many companies are the SEC’s changes regarding executive compensation. Public companies (other than “smaller reporting companies”) are now required to provide information about how their compensation policies create incentives that can affect overall risk. For example, if a company awards bonuses for achieving certain performance targets, these bonuses could provide an incentive for employees to take excessive or inappropriate risks. Disclosure is required if a policy or practice is “reasonably likely to have a material adverse impact on the company.”

The rules also revise the Summary Compensation and Director Compensation tables to require disclosure of the aggregate grant date fair value of stock and option awards, in accordance with Financial Accounting Standards Board (FASB) standards. Previous rules required disclosure based on the dollar amount recognized for financial reporting purposes — which in many cases is substantially lower. Awards subject to performance conditions are valued at the grant date based upon the probable outcome of such conditions, with the maximum potential value disclosed in a footnote.

Tone at the top
The final rules also require new disclosures regarding corporate governance and leadership, including:

Directors and nominees. To help investors determine whether directors and director nominees are a good fit for the company, the SEC has expanded disclosures regarding their qualifications. This includes details on the “specific experience, qualifications, attributes, or skills that qualify” them to serve as directors. The new rules also require disclosure of directorships within the last five years (not just current directorships) and expand the period for disclosures of legal proceedings involving directors, nominees and executives from the last five years to the last 10 years.

Leadership structure. Companies must describe their board leadership structure and explain why they believe it’s the best structure for their organization. Some companies, for example, combine the role of principal executive officer and board chair, and designate a lead independent director to chair meetings. Under the new rules, such a company would have to explain the specific reasons for this structure and describe the lead independent director’s role within it.

Risk oversight. Companies must disclose information about their board’s role in the risk oversight process and the relationship between the board and senior management when it comes to risk. Respondents might disclose, for example, how the board implements and runs its risk oversight function; whether those overseeing risk management report directly to the board or to a committee; and whether and how the board monitors risk.

Where best interests lie
The final rules also tackle the role played by compensation consultants. These advisors may have a conflict of interest if they play a role in setting executive or director compensation and also provide other services to the company, such as benefits administration, human resources consulting or actuarial services.

To inform investors of potential conflicts, the new rules require companies to disclose, under certain circumstances:

• Fees paid both for compensation consulting and additional services,
• Whether management was involved in the decision to engage the consultant or its affiliates for noncompensation services, and
• Whether the board or compensation committee approved the additional services.

These disclosures are required only if a compensation consultant’s fee for additional services in the most recent fiscal year exceeded $120,000. Certain other consultants are excluded, including those whose role is limited to consulting on broad-based, nondiscriminatory plans or to providing survey or other information that they do not customize for the particular company.

Voting results
Under previous rules, shareholder voting results were included in quarterly and annual reports. The new rules make several changes to provide more timely voting results.

Companies must report preliminary results of shareholder votes on a Form 8-K within four business days after the end of the meeting at which the vote was held. And they must report final results (on an amended filing, if necessary) within four business days after they become available.

A valuable opportunity
This may seem like a lot of information to absorb and implement. But the new rules provide a valuable opportunity to review your company’s compensation policies, leadership structure, and corporate governance and risk management practices.

For more information, please contact Brian Langham at 312-980-2990, blangham@BlackmanKallick.com or your Blackman Kallick representative.

 

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.