Grahall Comments on SEC’s Proposed Proxy Disclosure Rules


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business-strategy-chess-41In July 2009 the SEC released proposed changes to Proxy Disclosure rules “to enhance the compensation and corporate governance disclosures registrants are required to make about: their overall compensation policies and their impact on risk taking; stock and option awards of executives and directors; director and nominee qualifications and legal proceedings; company leadership structure; the board’s role in the risk management process; and potential conflicts of interest of compensation consultants that advise companies.” 

The SEC invited public comment with a deadline for submission of mid-September, 2009. Not surprisingly, many commented. Well over 100 comments have been surfaced on the SEC’s web site to date.  (To read them click here.)

Grahall, too, commented on these proposed rule changes, with comments broken down into four general subject areas:
I. enhanced risk disclosure (as it directly relates to compensation),
II. proposed changes to the summary compensation table,
III. enhanced disclosure of director qualifications to serve on the Board,
IV. concerns regarding potential conflicts of interest with respect to executive compensation consultants who provide both compensation advice and other services to the same clients.

To read the entirely of our comments click on this link: Grahall’s Response to Request for Comment Regarding Proposed Changes in Proxy Disclosure (Release #33-9052)

Our comments are summarized below:

I. Enhanced Risk Disclosure

As a proponent of compensation schemes which reflect a “Total Rewards” perspective, Grahall supports the SEC’s proposed enhanced disclosure scheme with respect to all compensation programs administered by public companies. Grahall believes that appropriate consideration of the “leverage” chosen by the Board/Committee is an integral element of any well thought out compensation design program, and is of critical importance to all stakeholders, including investors. Accordingly, we support full disclosure of risk/reward considerations by all filers irrespective of size, industry or which employees of the company are eligible to participate in the program.

Grahall also supports requiring an affirmative statement regarding the non-material impact of a reward design on risk and the financial condition of the filer.  Without such a requirement, many companies simply won’t undertake an analysis of the risk elements, taking refuge in the fact that they can rely on a non-materiality defense in the event that they are ever engaged in litigation. 

II. Summary Compensation Table

Grahall believes that proxy disclosure is critical to facilitating the ongoing improvement of compensation practices in U.S. public corporations and that the current system of proxy disclosure, while significantly improved with the advent of the CD&A, can still be enhanced without imposing any material additional cost to filers.  We also believe that the Summary Compensation Table is the lynchpin of executive compensation disclosure.  A summary of our suggested improvements follow below.
1) fully value equity awards on an appropriate grant date, and to attribute the value of such awards to the compensation year for which they are being awarded (without regard to the date such awards are actually granted). 
2) add a simple column to the current Summary Compensation Table which would require filers to indicate the number of years that each grant is intended to cover. 
3) require disclosure of the full value of the current equity award and show the then current value of the replacement award as an offset.  In this way, shareholders can better assess the impact of the award. This requirement can be effectuated either with an additional column or with footnote disclosure.
4) limit the Summary Compensation Table to decisions made by the Compensation Committee with respect to named executive officer compensation for the applicable year.
5) create of a new “Wealth Appreciation” table, listing historic grants, appropriate strike prices, and current values at the conclusion of the compensation year, so that shareholders would have a simple straightforward and easy to understand tabulation of the executive’s then-current equity position. 

III. Director Qualifications

Grahall believes enhanced disclosure of director qualifications is a desirable change.  We also believe this should be done on an annual basis, not just when a director is initially elected to the Board.  By requiring annual disclosure, shareholders can consider such qualifications each time they vote for a position, and will not have to parse through multiple years of prior filings to determine the appropriateness of a director’s experience.  We would also encourage filers to illustrate and describe how the Board’s size and composition is appropriate for the company given its business strategy and market position. 

IV. Conflict Of Interest

Grahall believes that neither real nor apparent conflicts of interest at compensation consulting firms are in the best interests of shareholders or the general public and in based on our understanding of the pressures at consulting firms to “cross sell” services, we would propose the SEC consider even tougher disclosure rules, and place renewed emphasis on strict enforcement of the reporting rules.
We believe these pressures were well and accurately summarized in the government’s own study, commissioned by Congressman Henry Waxman in 2007 (EXECUTIVE PAY: CONFLICTS OF INTEREST AMONG
) .  This report highlighted that the conflict of interest problem is pervasive, that executive compensation consulting fees are relatively small, that consultants aren’t adhering to the SEC’s existing reporting rules, and that CEO pay is higher at companies who hire conflicted consultants. 

There is little doubt that reforming and exposing conflicted consulting arrangements remains a critical aspect of the government’s effort to improve the ability of Boards, Compensation Committees and shareholders to design, implement and maintain executive compensation programs that are fair and balanced. Grahall believes that this result is best accomplished by seeking advice from qualified independent consultants, and at an absolute minimum, shareholders should be aware of the nature of any potential conflict which could affect the advice the Board and Compensation Committee is receiving from its consultant.

Contact Garry Rogers at

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