Compensation Committee Corner : Executive Compensation Lawyer & Attorney : Winstead Law Firm : Director Liability, Employee Benefit Arrangements

New SEC rules require narrative disclosure of compensation policies and practices that are "reasonably likely" to have a "material adverse effect" on the company. The purpose of this Post is to highlight that implementation (or increased use) of mitigating factors could negate risk assessment disclosure while simultaneously bolstering a company's compensation governance practices.

Background

On December 16, 2009, the SEC adopted final rules (Prior Post) that broaden executive compensation disclosure within proxy statements and annual reports. The new disclosure rules are generally effective February 28, 2010 (Prior Post).

One requirement of the new rules is that a company must provide narrative disclosure of compensation policies and practices that are "reasonably likely" to have a "material adverse effect" on the company. An important point is that no disclosure is required unless the materiality threshold is satisfied (though financial institutions participating in TARP are subject to different requirements).

Mitigating Factors

A risk assessment should be conducted to determine whether the materiality threshold is satisfied. This assessment should (i) focus on individuals (and groups of employees) who could cause risk to the company, and (ii) identify features of compensation programs that could entice executives (or groups of employees) to take risks that might threaten the company's value.

However, these risks (and the subsequent "materiality" analysis) should be balanced against mitigating factors such as:

• stock ownership guidelines that require an employee or director to own a meaningful amount of equity in the company until some future date (e.g., retirement, termination of employment);
• clawback provisions or policies that are more stringent than currently required under Section 304 of the Sarbanes-Oxley Act of 2002; and/or
• compensation limits or caps to ensure an employee's total pay does not exceed acceptable levels.

In addition to helping negate risk assessment disclosure, the above mitigating factors (and others not addressed above) are a form of good compensation governance (and positive CD&A disclosure) that every compensation committee should consider implementing or enhancing this proxy season.

• Email This
• Print
• Comments
• Trackbacks

Recently the SEC issued interpretative guidance (PDF) on how the effective date of the new proxy disclosure rules (Previous Post) would apply in various factual scenarios.  Though the new proxy disclosure rules are effective February 28, 2010, the interpretative guidance provides the following transition rules:

• An issuer must comply with the new rules if its fiscal year ends on or after December 20, 2009, and its definitive proxy statement is filed on or after February 28, 2010. Under such facts any preliminary proxy statement required to be filed would have to comply with the new rules even if it is filed prior to February 28, 2010.
  
• Under the above facts an issuer's proxy statement must comply with the new rules even if its 2009 Form 10-K is filed prior to February 28, 2010.
  
• An issuer is NOT required to comply with the new rules if its fiscal year ends prior to December 20, 2009. This rule applies even if the proxy is filed on or after February 28, 2010.
  

Addressing voluntary compliance, the interpretative guidance provides that an issuer may voluntarily comply with some or all of the new rules; however, if an issuer desires to comply with amendments to the Summary Compensation Table and Director Compensation Table, then it must comply with all of the new rules relating to the form filed.

Addressing Form 8-Ks, the interpretative guidance provides that new item 5.07 to Form 8-K (generally requiring issuers to disclose the results of a shareholder vote and to have that information filed within four business days after the end of the meeting at which the vote was held) will apply if the annual meeting of shareholders takes place on or after February 28, 2010, even if the proxy was mailed prior to that date.  Annual meetings taking place prior to February 28, 2010 would not have to comply with new item 5.07.

The interpretative guidance may be good news for those issuers with a fiscal year ending prior to December 20, 2009, but who file their proxy (or have their annual meeting) on or after February 28, 2010.

• Email This
• Print
• Comments
• Trackbacks

On December 16, 2009, the SEC adopted final rules (PDF) that broaden executive compensation disclosures within proxy statements and annual reports. The new rules are effective on February 28, 2010, just in time for the 2010 proxy season.

As a summary, the final rules generally:

• expand director qualification disclosures,
• require a description of the board's role in risk oversight and an explanation of its leadership structure (e.g., whether it combines the CEO and Chairman positions),
• require disclosure of certain fees paid to compensation consultants,
• require a discussion of compensation risk management policies that are "reasonably likely to have a material adverse effect on the company", and 
• change the valuation of equity awards reported in the Summary Compensation Table and Director Compensation Table (from the accounting expense recognized during the year to the grant date fair value).

Though the final rules are straight forward and for the most part consistent with the proposed rules, companies should review these rules to determine whether immediate action is required. For example, director and officer questionnaires will likely need to be revised, the company may need to gather information on engagements with its compensation consultants, and it is possible that using the grant date fair value of equity awards may change the identity of a company's named executive officers for 2009.

• Email This
• Print
• Comments
• Trackbacks