Ahead of the Curve

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Expert Perspective by Grahall’s OmniMedia Editorial Board

It was likely with some relief that public companies heard on October 2, 2009 that the SEC would delay the implementation of Proxy Access Rule changes.  According to an article in Law360: “U.S. Securities and Exchange Commission Chairwoman Mary Schapiro said… that proposed changes to proxy access rules would not be finalized until 2010 at the earliest, following a deluge of comments to the regulator.” That’s one major issue set aside for now, but there are many more proxy changes poised for approval before the 2010 Proxy Season arrives. 

The two most impactful to executive compensation are 34-6021 Shareholder Approval of Executive Compensation of TARP Recipients (i.e. Say on Pay), which would permit a separate shareholder advisory vote to approve compensation of executives whose companies have received financial assistance under TARP.  If implemented, this rule would impact hundreds of TARP companies, mostly banks. 
The other is  33-9052 Proxy Disclosure and Solicitation Enhancements that proposed amendments 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.” 

This one part of this SEC proposal has spurred quite an uproar in the consulting community . (See Grahall blogs “Important Principals May and Must be Inflexible” and “Management, Board and Comp Consultants: A Change of Heart?”).

So what is likely to be passed for the 2010 Proxy season and how should you prepare? Let’s look at each of the SEC proposals:

A) 34-6021 Shareholder Approval of Executive Compensation of TARP Recipients (i.e. Say on Pay)

Say on pay is a shoe-in for the 2010 proxy season for TARP companies, but non-TARP companies can’t rest easy because numerous other legislative proposals would extend this rule to all public companies.  These proposals include Schumer’s Shareholders Bill of Rights Act, Durbin’s Excessive Pay Shareholder Approval Act, and the House of Representative’s Corporate and Financial Institution Compensation Fairness Act of 2009, which is now before the Senate.

So how should companies prepare for say on pay? Try a spin on the Nike slogan and “just ask them.”  Significant value could be gained by finding out, in advance, how your major shareholders might vote.  Also, take a serious look at the processes and protocols by which executive compensation is determined and consider hiring an impartial advisor to help with the evaluation.  Don’t be taken by surprise; make sure you anticipate all the possible complaints and resolve them or prepare valid responses.

B) 33-9052 Proxy Disclosure and Solicitation Enhancements:  Don’t be fooled by this innocuous title. This proposal contains 5 very significant and challenging recommendations.  Let’s take a look at each of them.

1) Proposed changes to the Compensation Discussion and Analysis Disclosure (CDA) would “broaden their scope to include a new section that will provide information about how the company’s overall compensation policies for employees create incentives that can affect the company’s risk and management of that risk.” 

To prepare, companies should completely familiarize themselves with the proposed rules.  Situations that require disclosure will be based on the company’s compensation programs, so it will differ for each organization.  And, undoubtedly, the SEC will request additional information to be provided by many companies.

2) Revisions to the Summary Compensation Table to “revise the Summary Compensation Table and Director Compensation Table [to include] disclosure of stock awards and option awards to require disclosure of the aggregate grant date fair value of awards computed in accordance with FAS 123R.” 

To prepare, companies should ensure that the compensation committee fully understands the proposed rules, and begins to track information on both the grant-date fair value and dollar value of stock and option awards granted during fiscal 2009.  The compensation committee should also compile data on prior years’ stock and option awards.

3) Enhanced Director and Nominee Disclosure to “require disclosure detailing for each director and nominee for director the particular experience, qualifications, attributes or skills that qualify that person to serve as a director of the company as of the time that a filing containing this disclosure is made with the Commission, and as a member of any committee that the person serves on or is chosen to serve on (if known), in light of the company’s business and structure.”

To prepare for this companies must  educate the Board and the nominating committee on the proposed rules.  And then, when evaluating individuals for board nomination and committee assignments, make certain to incorporate the SEC’s proposed expanded disclosure rules.

4) New Disclosure about Company Leadership Structure and the Board’s Role in the Risk Management Process to “require disclosure of the company’s leadership structure and why the company believes it is the best structure for it at the time of the filing. This proposed disclosure would appear in proxy and information statements. Under the proposed amendments, companies also would be required to disclose whether and why they have chosen to combine or separate the principal executive officer and board chair positions.”

To prepare for this, the board of directors, nominating committee and audit committee must fully understand the proposed changes.  Now is the time to re-examine the company’s corporate governance to ensure that the rules are taken into account (especially if there are expected changes to the company’s leadership structure) and for boards and their audit committees to re-evaluate the company’s risk management function.

5) Require “Disclosure of fees paid to compensation consultants and their affiliates when they play any role in determining or recommending the amount or form of executive and director compensation, if they also provide other services to the company.  In addition, the proposed amendments would require a description of any additional services provided to the company by the compensation consultants and any affiliates of the consultants.”

To prepare, a company should be educating boards and compensation committees about the proposed rules and more importantly taking steps now to determine the extent of the company’s involvement with its compensation consultants, including all project and fee arrangements. Be fully informed and be prepared to defend or replace your advisors.  Don’t ask the advisors to write the defense for you!  And read several Grahall blogs on this topic, most recently It Just Makes No Sense.

From our perspective, we believe that the SEC will be “all over” the proxies this year.  The embarrassment they suffered as a result of the Madoff scandal will result in many, many additional requirements for information and clarification.  That scandal, coupled with the fact that the SEC is a) understaffed, b) inexperienced, and c) underperforming, will take its toll on public companies this year.  

Public companies will be best positioned to address both the proposed rules and any follow up questions if they have confidence in the independence of their advisors and board members, have clearly followed the protocols and procedures for setting executive pay, and can clearly articulate their risk management procedures.  If you can’t do this today, call us.  We can help.

Contact Grahall’s OmniMedia Editorial Board at edie.kingston@grahall.com

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