What to Do Now
Given that the new rules will apply to many filings that are anticipated to be made this proxy season, companies must quickly respond to the anticipated changes brought about by the SEC rules. Initial steps should include:
- Revise your D&O Questionnaire to capture more information about directors, nominees, and executive officers for longer time frames;
- Specifically highlight the D&O Questionnaire changes to directors and executive officers so that they can focus on the additional information that is now required;
- Revise your disclosure controls and procedures to ensure that information required by the new rules is recorded, processed, summarized, and reported in a timely manner;
- Consider whether any changes should be made to the board’s leadership structure, risk oversight, diversity policy or the use of compensation consultants by the company and the board, all in light of not only the new disclosure requirements, but also given the underlying shareholder concerns and the policies of applicable proxy advisory firms;
- Carefully consider how the new information regarding director qualifications will be developed and presented in the proxy statement, given the significance of this disclosure in the context of an ever-rising level of shareholder activism that often targets specific directors for withhold/against vote campaigns; and
- If it does not already exist, develop a process to evaluate the relationship of compensation and risk for the entire organization, as well as specifically for the named executive officers.
The steps in this process might include:
- Create an “inventory” of known risks, which may go beyond the risks listed in the “Risk Factors” section of the company’s periodic reports;
- Identify and evaluate compensation policies and practices within the organization, and determine how those compensation policies and practices relate to specific risks;
- Determine if the risks are reasonably likely to have a material adverse effect on the company; and
- Develop the disclosure to be included in the proxy statement, including appropriate disclosure for those situations where it is concluded that risks related to compensation are not reasonably likely to have a material adverse effect on the company.
The 2010 proxy season promises to be tumultuous, particularly given the changes to New York Stock Exchange Rule 452 that prohibit discretionary voting by brokers in the election of directors. Shareholders and proxy advisory services will likely focus on these new SEC-mandated disclosures when making their voting decisions and voting recommendations on the election of directors. In addition to ensuring compliance with the new rules, companies will want to work to make their proxy statement disclosures as clear and understandable as possible, focusing in particular on the governance and executive compensation considerations that are of most interest to shareholders and the SEC.
This article was co-authored by David M. Lynn, Michael T. Frank and Lawrence R. Bard of Morrison & Foerster LLP. Lynn, co-head of the firm’s public company practice, is former chief counsel in the corporate finance division at the SEC. Frank focuses on executive compensation.