SEC Passes Additional Requirements for Proxy Statements and Other SEC Filings

February 9, 2010

On December 16, 2009, the Securities and Exchange Commission passed rules requiring public companies to disclose more information to their shareholders regarding executive compensation, directors’ qualifications for serving in office, board oversight of risk and other governance issues.

Stock Awards – Fair Value on the Date of Grant.  Formerly, the rules required disclosure of the annual accounting charge of stock option grants in the Summary Compensation Table and Director Compensation Table.  To more accurately reflect the decision made by the compensation committee in making such awards, the new rules require disclosure of the fair value on the date of grant, computed in accordance with FASB ASC Topic 718.

Performance Awards – Probable Outcome Value vs. Potential Maximum Value.  Under the grant date fair value method for valuing stock awards (see above), if fair value on the grant date were based upon the potential maximum performance (and thus maximum compensation) being attained, companies would be disclosing values that the compensation committee had set as a “cap” on attainable compensation, rather than the lower “target” compensation the committee expected to pay.  To avoid investors and competitors misperceiving intended compensation levels, which could inflate benchmarking values or discourage some committees from using performance awards as a component of compensation, performance awards will be valued based upon “probable” outcome as of the grant date.

Employee Compensation Policies That May Encourage Risk-Taking Behavior (applicable only to accelerated filers).  In response to the crisis in the financial services sector in 2008-2009, the SEC is now requiring public companies to disclose information on how incentive compensation policies may encourage risk-taking behavior.  The requirement does not apply to smaller reporting companies, but accelerated filers must now provide a narrative disclosure of any compensation policies or practices that create risks that are “reasonably likely” to have a “material adverse effect” on the company.  If the company has offsetting steps or controls designed to limit or mitigate risk or balance incentives, the board may consider those controls in determining whether the company has crossed the “reasonably likely” or “material adverse effect” thresholds, either of which would trigger the additional disclosure requirements. The new requirements apply with respect to all employees, not just directors and top executives.

Compensation Consultants Providing Other Services.  To enable investors to identify potential conflicts of interest between companies and their compensation consultants, the SEC now requires that if a compensation consultant also provides other types of services to the company and receives fees exceeding $120,000 for those additional services, certain disclosures, including the amount of fees paid, must be made.

Leadership and Risk Oversight.  In response to the failure of numerous financial institutions and the instability of the financial sector generally, the SEC has adopted new disclosure requirements with respect to the leadership and the division of responsibilities among the board, the principal executive officers and independent directors, all with a view toward improving risk management, or more specifically with respect to the board, risk oversight.  The new rule require issuers to disclose:

  • the rational behind its board leadership structure,
  • whether and why it has chosen to combine or separate the principal executive officer and board chairman positions,
  • a description of the board’s role in the oversight of risks,
  • whether risk oversight is performed by the whole board, by the audit committee, by a risk oversight committee or by any combination of the above or any other manner, and
  • whether the individuals who supervise the day-to-day risk management responsibilities report directly to the board as a whole or to a board committee or how the board or committee otherwise receives information from such individuals.

Directors and Nominees – Qualifications and Legal Proceedings.   The SEC has increased disclosure requirements with respect to both directors’ and nominees’ background and qualifications. Issuers are now required to disclose the particular experience, qualifications, attributes or skills that led the board to conclude that the director (or nominee) should serve as a director.  Companies must also disclose any and all directorships held by each director and nominee during the past five years regardless of whether a directorship is still held at the time of filing. Formerly, disclosure of only current directorships was required.  Lastly, the SEC expanded disclosure of legal proceedings involving a director or nominee in an attempt to better enable investors to assess the individual’s competency and character.  Disclosure is now required for legal proceedings that occurred in the last ten years rather than five, and for certain types of legal proceedings that formerly were not required to be disclosed.

Board Diversity.  On the premises that board diversity is a factor in investors’ voting decisions and diverse board are better able to recruit talent and retain staff, the SEC now requires disclosure of the board’s policies on diversity.  The company must disclose whether its nominating committee considers diversity in evaluating and selecting individuals for nomination.  If diversity is considered by the committee, the company must disclose how its diversity policy is implemented as well as how its effectiveness is assessed.

Immediate Reporting of Voting Results on Form 8-K.  Citing the direct and immediate impact voting can have on elections, changes in shareholder rights, investments, divestments and capital changes, the SEC will now require voting results to be reported on Form 8-K.  Preliminary voting results must be filed within four days after the shareholders’ meeting, in which case a Form 8-K/A (an amendment to the initial Form 8-K) must be filed within four business days of the final voting results being known.  However, if the final voting results are known within the four business days immediately following the meeting, the company may simply disclose the final voting results in the initial Form 8-K.