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Expert Perspective by Grahall’s OmniMedia Editorial Board

expert perspective telescopeCompliance Week summarized a November 9, 2009 speech by Shelly Parratt, deputy director of the SEC’s Division of Corporation Finance, in their November 10, 2009 article SEC on 2009 Proxy Season, Expectations for 2010saying “Note to those tasked with drafting the Compensation Discussion and Analysis [CD&A] section of the proxy: Pay particular attention to your analysis and performance targets disclosures, because the Securities and Exchange Commission staff will.”  The article concludes with a quote from Parratt saying “Read our guidance”.

Essentially, when preparing analysis and performance targets disclosures in the CD&A, Boards are supposed to say why they chose to pay executives in a certain way and provide background on whether the executives did or did not meet goals, supporting that with and description of the company’s goals.  The SEC provides way to dodge some of these requirements by permitting companies to (per the article) “…omit specific quantitative or qualitative performance-related targets, even where they’re material to compensation policies and decisions, if disclosing them would likely cause competitive harm.”  So although company goals would be something that shareholders would have a great interest in. companies use this “competitive harm” clause to avoid disclosing the goals and how those would be translated into compensation for the executives.

The  only “enforcement” power that the SEC holds to make companies provide these details is to write a letter requesting a rewrite of the CD&A along with a proxy amendment,.   While some might consider the need to amend a proxy to be a burden and be concerned that it may raise red flags with securities analysts, we do not see this as the case. The CD&A is seen by securities analysts as a relatively unimportant part of the proxy disclosure and proxy amendments resulting from changes in the CD&A would not cause the analysts much concern.  Since the only penalty is one of inconvenience rather than some financial consequence there is little incentive for a company to step forward initially and provide information that could help their competitors more than shareholders.  All the uproar over executive pay, with the public, media and government focus will not change this fact.   

This is particularly true if Boards don’t want to disclose the goals and how these goals are translated into how those are translated into pay for executives because, in fact, the compensation committee has been doing a less than effective job at making these connections.  Increasing transparency means increasing the workload on the compensation committee to actually address these linkages. In our experience, too often the compensation committee’s focus on performance goals is at best superficial with little if any significant consideration about how specific business strategies and value chain strategies link to rewards design and performance goals. 

So is this year’s speech just posturing on the part of the SEC?  Maybe not.

In a recent conversation with one of Grahall’s Hedge Fund clients about the Galleon case (a major fraud case relating to insider information), the client mentioned that he believed that the SEC is both embarrassed and angry over the Madoff case and expects that the SEC will be much more aggressive in their review of proxy disclosures this year. 

The Grahall take on things is that when it comes to the government, it’s simply not worth it to anger them.   So we advise that you take a thoughtful approach to your CD&A disclosures and yes, read the SEC guidance.

Contact Grahall’s Editorial Board at

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