Wednesday November 26, 2014

SEC Rules Unleash New Comp Disclosures

New comp disclosure rules from the SEC go into effect February 28, just in time for the 2010 proxy season.

Directors find themselves facing new rules on compensation from the Securities and Exchange Commission. The SEC updated its Compliance and Disclosure Interpretations (C&DIs), which focus on executive compensation disclosure enhancement rules. The new rules become effective February 28, 2010—with not much time before the 2010 proxy season.

The SEC addresses that classified boards must continue to disclose a director’s experience, qualifications and skills that led the board to conclude that the individual is qualified to serve on the board. The grant-date fair value of an equity award must be included even if the award is forfeited during the same year it is granted. The SEC also recommended that companies disclose their compensation policies and practices as they relate to the registrant’s risk management and be presented with the registrant’s other item 402 disclosure. Any compensation paid to directors for “additional services” must be explained and boards must be prepared to provide facts to back up any proposals to increase compensation.

“People are struggling with the timing of the new rules,” says Pat Quick, a partner in law firm Foley & Lardner’s transactional and securities practice. Quick notes that the rules were first proposed in July 2009 but were not implemented until December. “You could have approached your boards and committees in July but the rules weren’t final and you didn’t know when they’d be finalized,” Quick says. The timing of the new rules leaves some boards wrestling with new compensation restrictions as well as rules for director qualifications, diversity and board structure.

Companies are also preparing for “say on pay” to be mandatory in proxy disclosures in 2011. “Directors aren’t accustomed to putting shareholder advisory votes on their proxy,” adds Linda A. Wilkins, founder and managing partner of the Law Offices of Linda A. Wilkins. “They’re trying to keep it short. Very few clients (of mine) are putting additional shareholder disclosures this year—we’re just trying to adjust.” Wilkins believes boards are looking at risk assessments already performed and are having some poignant discussions tying together any “excessive compensation practices.”

Not all directors feel the new rules are a challenge. Sam Coats, an aviation consultant and director who sits on the compensation, governance and executive committees for Texas Industries, believes boards need to embrace transparency. “I used to think having a job on the audit committee was the worst but that was before I joined a comp committee,” Coats quips. Coats says comp committees aren’t only focused on basic compensation concerns but also perquisites, such as club comps and other items that at one time were standard fare in the executive suite. “I’ve clashed with more than one CEO over the years,” says Coats. “I think pay should be 50 percent salary, 15 percent short-term performance and 35 percent long-term performance—and that long-term performance should be in line with the long-term performance of the company.”

The decision by the SEC may leave some companies attempting to “catch up,” but Quick notes that the rules highlight some key subjects, which are likely to appear during this year’s proxy season. “The SEC cannot directly affect how companies are governed. Instead, it steers people through its disclosure,” Quick says.

Goldman Sachs’ decision in December to voluntarily offer a shareholder pay vote should not be taken as a sign that other companies will follow suit. “I think other companies (not in the financial services industry) are holding back in part just to see what rules unfold,” Quick says. “The public eye had such a glare on their pay practices because they were publicly tied to the fact that it was government money—low and behold, they were using that government money to pay bonuses.”

“Even though things aren’t mandatory (yet),” says Coats. “I think you will see boards being proactive. I think it’s going to be very important to articulate the comp philosophy of the company that we will go to great lengths to do that.” Coats emphasized that most boards are already sensitive to how their interests are aligned with those of long-term shareholders.

“More and more shareholders are going to insist that companies don’t have that entitlement mentality,” Coats says. Having a voice in the boardroom that reverberates into the C-suite and challenges CEOs to recognize the difference between shareholder groups will result in comp practices that are more aligned with shareholder expectations.

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