In comparison to recent proxy seasons, there are very few new disclosure requirements to tackle this year. There remains, however, much work to be done. Current market turmoil has refocused attention on executive compensation. Many companies will be faced with the challenge this year of drafting new disclosure reflecting the effects of economic conditions and recent legislation on compensation programs. The SEC has continued to deliver the message that companies have a long way to go before mastering the executive compensation disclosure the SEC was looking for when it adopted the revised rules in 2006. The 2009 proxy season represents a third opportunity for companies to improve their compensation disclosure and meaningfully convey their compensation stories to shareholders. The SEC has also emphasized the need for companies to improve their MD&A disclosure by including more specific analysis and enhanced liquidity and capital resource disclosure. Many companies will also need to comply with the mandatory e-proxy rules for the first time this proxy season. Finally, proxy drafters should be aware of updated SEC rules and guidance and revised director independence standards. Set forth below are key items companies should consider as they enter the 2009 proxy season.

Executive Compensation Disclosure

Companies (other than smaller reporting companies) will need to provide three years of annual compensation in the summary compensation table this year. Companies should assess, early in the process, how the comparative data will appear and how “year-over-year” information may need to be explained or discussed. Companies that received SEC staff comments concerning their 2008 compensation disclosure will need to be careful to disclose information in their proxy statements as indicated in their responses to the SEC. In addition, all companies should review and update their Compensation Discussion & Analysis (“CD&A”) disclosures and related tables to address: (1) the observations made by John W. White, Director of the SEC’s Division of Corporation Finance, in his October 2008 speech and (2) the updated Compliance and Disclosure Interpretations (“C&DIs”), as discussed below.

Observations From John White Regarding Executive Compensation Disclosure. Although the SEC did not do a targeted review of executive compensation disclosures in 2008 as it did in 2007, the SEC did review executive compensation disclosures in connection with the Division of Corporation Finance’s traditional review program. In his speech entitled, “Executive Compensation Disclosure: Observations on Year Two and a Look Forward to the Changing Landscape for 2009,” Mr. White discussed his observations regarding the 2008 executive compensation disclosures and his suggested approach to compensation disclosures in 2009.

2008 Disclosures. Similar to the 2007 season, the primary areas of SEC comment regarding 2008 executive compensation disclosures were as follows:

  • Analysis. Each company should review and revise its CD&A to improve disclosure with respect to how and why its compensation committee arrived at specific executive compensation decisions and policies. Companies need to explain more fully the connection between their philosophies and processes, on the one hand, and the numbers presented in the compensation tables, on the other. Mr. White encouraged companies to “[1] explain and place in context each of the specific factors considered when approving particular pieces of each named executive officers' compensation package; [2] analyze the reasons why the company believes that the amounts paid are appropriate in light of the various factors it considered in making specific compensation decisions; and [3] describe why or how determinations with respect to one element impacted other compensation decisions.”
  • Performance targets. Companies must analyze carefully whether to disclose specific performance targets. This requires an analysis of whether these targets are material to executive compensation policies and decisions (and therefore subject to disclosure) and, if so, whether disclosure would result in competitive harm to the company. If a company withholds targets on the basis of potential competitive harm, the company must be ready to support its determination and provide a meaningful assessment of the difficulty of achieving the targets. (See also Question 118.04 in the updated C&DIs, which is discussed below.)
  • Benchmarks. Companies that benchmark a material element of compensation should identify the companies that comprise the peer group for benchmarking purposes. In addition, companies should explain in detail why the peer companies chosen are appropriate for their business and compensation, as well as the relationship between actual compensation and the data utilized in benchmarking or peer group studies. (See also Question 118.05 in the updated C&DIs, which is discussed below.)

2009 Disclosures. Mr. White encouraged all companies to start with a blank sheet of paper in preparing their proxy disclosure for the upcoming year, and to reread the following materials:

Mr. White noted that he expects that current market conditions are affecting compensation decisions and will therefore need to be reflected in the CD&A. He specifically mentioned that the Troubled Asset Relief Program (“TARP”), which was established under the Emergency Economic Stabilization Act, requires additional CD&A disclosure by the financial institutions participating in the program. (For more information regarding the required TARP CD&A disclosures, see: Mr. White and various commentators have suggested that certain disclosure (e.g., risk analysis, clawback policies, golden parachute and severance arrangements and the tax implications of executive compensation programs) in CD&As of companies not participating in the TARP may also be more thoroughly reviewed by the SEC in 2009.

SEC Guidance. In July 2008, the SEC updated its C&DIs for Regulation S-K. A few of the compensation-related C&DIs worth noting include:

  • Performance targets. When performance targets are a material element of a company's executive compensation policies or decisions, a company may omit targets involving confidential trade secrets or confidential commercial or financial information only if their disclosure would result in competitive harm. A company should use the same standard for evaluating whether target levels may be omitted as it would use when making a confidential treatment request. To reach a conclusion that disclosure would result in competitive harm, a company must undertake a competitive harm analysis taking into account its specific facts and circumstances and the nature of the performance targets. In the context of the company's industry and competitive environment, the company must analyze whether a competitor or contractual counterparty could extract from the targets information regarding the company's business or business strategy that the competitor or counterparty could use to the company's detriment. A company must have a reasoned basis for concluding, after consideration of its specific facts and circumstances, that the disclosure of the targets would cause it competitive harm. The competitive harm standard is the only basis for omitting performance targets if they are a material element of the registrant's executive compensation policies or decisions. A company that omits performance targets on a competitive harm basis is required to discuss how difficult it will be for the executive or how likely it will be for the company to achieve the undisclosed target level. (Question 118.04)
  • Benchmarking. “Benchmarking” generally entails using compensation data about other companies as a reference point on which, either wholly or in part, to base, justify or provide a framework for a compensation decision. The term “benchmarking” would not include a situation in which a company reviews or considers a broad-based third-party survey for a more general purpose, such as to obtain a general understanding of current compensation practices. (Question 118.05)
  • Compensation consultants. A company’s compensation committee disclosure required by Item 407(e)(3) should include information regarding any role of compensation consultants in determining or recommending the amount or form of executive and director compensation. If a compensation consultant plays a material role in the company's compensation-setting practices and decisions, then the company should discuss that role in the CD&A. (Questions 118.06 and 133.08)

The updated C&DIs are available at

E-Proxy Rules

In 2007, the SEC adopted amendments to its proxy rules to require public companies and other soliciting persons to furnish proxy materials to shareholders using the Internet. All large accelerated filers except mutual funds were required to comply with the new rules for solicitations commencing on or after January 1, 2008. All other companies and other soliciting persons, including mutual funds, are required to comply with the e-proxy rules for solicitations commencing on or after January 1, 2009. For a discussion of the SEC’s mandatory e-proxy rules, see our Corporate Update, dated June 27, 2007, available on

Pursuant to the e-proxy rules, all companies and other solicitors subject to the rules must post a complete set of proxy materials on a website other than EDGAR and provide notice of availability of the materials to shareholders. The web-posted materials must be presented in a format “convenient for both reading online and printing on paper.” The website must also be maintained in a manner that does not infringe on the anonymity of a person accessing it.

Pursuant to the e-proxy rules, public companies have two choices for proxy delivery: "notice and access" or "full set delivery.” If a company determines to rely on the notice and access model for some or all shareholders, it must send a notice to shareholders and file the notice with the SEC at least 40 days before the shareholders’ meeting. In addition, companies using the notice and access model must provide paper or e-mail copies of materials, as specified by the shareholder, within three business days of a shareholder request. If a company chooses to deliver proxy materials under the full set delivery model, the company will mail paper copies of the proxy materials to shareholders as it has done in the past, but the Company will need to include the additional language in the proxy materials required under Rule 14a-16(n) of the Securities Exchange Act of 1934, as amended.

In general, companies need to balance several factors in deciding whether to use the notice and access model for some or all shareholders. In particular, companies need to:

  • Quantify all costs under both the full set delivery model and the notice and access model;
  • Assess their ability to meet the 40-day notice requirement and the related need for earlier completion of the annual report and proxy statement (Note that intermediaries, such as Broadridge, will require that the materials are available even earlier.);
  • Assess their ability to meet the three-business-day requirement to fulfill requests for paper copies;
  • Identify voting patterns and participation and identify any quorum or meeting proposal concerns, based on both historical and future conditions;
  • Assess any shareholder preferences (This will probably vary depending on retail vs. institutional ownership.); and
  • Assess their ability to meet web-based requirements fundamental to the success of the notice and access model (such as their ability to meet system requirements and provide “web ready” documents that facilitate online use).

In addition, it is important to note that the notice and access model is not an acceptable method under ERISA for furnishing proxy materials to participants in a company's 401(k) plan containing company securities.

Issuers should review their annual meeting timetable and update it to reflect the model they will follow for delivery of proxy materials under the e-proxy rules.

Amendment to Item 407 of Regulation S-K

In September 2008, the SEC approved a technical amendment to Item 407(d)(3) of Regulation S-K relating to the Audit Committee Report. The amendment updates a reference to Independence Standards Board Standard No. 1 (“ISB No. 1”), which was previously adopted by the Public Company Accounting Oversight Board (“‘PCAOB”) as an interim standard. ISB No. 1 has been superseded by the PCAOB’s newly adopted ethics and independence rule. Prior to the amendment, an Audit Committee was required to state that it had received the written disclosures and the letter from the independent accountants required by ISB No. 1. As amended, the Audit Committee is now required to state that it has received the written disclosures and the letter from the independent accountants required by applicable requirements of the PCAOB for independent auditor communications with Audit Committees concerning independence. Companies will need to include the amended language in the Audit Committee Report and should also review their Audit Committee charters to confirm that any references to ISB No. 1 are revised.

Exchange Listing Standards; D&O Questionnaire

In August 2008, the SEC approved amendments to the NYSE and NASDAQ listing standards providing that a director is not independent if he or she receives more than $120,000 in compensation from a company during any 12-month period in the last three years. This compensation threshold had previously been set at $100,000 per 12-month period. In addition, the NYSE revised its independence standards to exempt a director having an immediate family member serving as an employee (not a partner) of a company’s independent registered public accounting firm, provided that the family member does not personally work on the company’s audit. Companies may need to revise certain independence questions in their D&O questionnaires to reflect the revised standards. See (NYSE) and (NASDAQ).

RiskMetrics (ISS) 2008 Post Season Report Summary and 2009 Voting Policies

The last proxy season can serve as a useful guide when analyzing what to expect this proxy season. Companies should review the “2008 Postseason Report Summary” issued by RiskMetrics (formerly known as ISS) for some of the 2008 proxy season trends. This report (available at[1]) reveals that:

  • More than 90 “say-on-pay” shareholder proposals requesting an annual advisory vote on compensation were submitted to companies in 2008, compared to 52 proposals submitted in 2007. As of June 30, 2008, the proposals averaged 42.1% support, which was only slightly higher than the 41.7% average in 2007. Ten of the say-on-pay proposals received a majority of votes cast, compared to eight proposals in 2007.
  • As of June 30, 2008, pay-for-performance shareholder proposals averaged 24.9% support, a decline from the 29.8% average in 2007. Shareholders withdrew more than 30 pay-for-performance proposals, compared with 15 withdrawals in 2007, suggesting that companies are more willing to engage with shareholders on this issue.
  • The number of shareholder proposals calling for board declassification increased by approximately 50% in 2008 to 99 proposals. Shareholder proposals calling for majority voting in director elections averaged 50.2% support in 2008, compared to 50.3% in 2007. More than half of the approximately 90 majority vote proposals were withdrawn by the proponents. The number of shareholder proposals requesting the right of shareholders to call special meetings significantly increased in 2008 to 56 proposals. The proposal averaged 67.1% support in 2008, which is the highest of all shareholder proposals submitted in 2008.
  • Shareholder proposals calling for an independent board chair averaged 29.8% support in 2008, compared to a 24.8% average in 2007.
  • Shareholders have become more willing to withhold votes for board members in uncontested elections. Directors at 82 S&P 500 companies received more than 10% opposition in 2008, compared to 64 and 57 companies in 2007 and 2006, respectively. Opposition to directors was greater when shareholder losses were higher and when shareholders concluded that executive compensation did not track the company’s performance.

In November 2008, RiskMetrics published its 2009 corporate governance policy updates. These include policy updates on “poor pay practices,” clawback shareholder proposals, resetting and repricing equity plans, compensation peer groups, performance tests, independent chair shareholder proposals and “poor accounting practices.” Companies should familiarize themselves with these policy updates as they get ready for the proxy season. An executive summary and the complete set of policy updates are available at:

No-Action Requests under Rule 14a-8

As disclosed in the November 2008 Staff Legal Bulletin No. 14D, the SEC has established a new email address for the receipt of no-action requests and correspondence under Rule 14a-8. Companies and proponents may email requests for no-action relief under Rule 14a-8 and related correspondence to [email protected] The email address should not be used for other types of no-action requests and correspondence. Email requests should include a contact name and telephone number. The staff cautioned companies that requests and correspondence sent to the email address will not be treated as confidential. The requests and related correspondence will be processed in the same manner as Rule 14a-8 no-action requests that are submitted on paper.

Form 10-K

MD&A and Risk Factor Disclosure. At the American Institute of Certified Public Accountants’ annual National Conference on Current SEC and PCAOB Developments held in December 2008, Pamela Long, Assistant Director in the SEC’s Division of Corporation Finance, discussed necessary improvements to MD&A disclosure. Ms. Long reminded companies to focus in the MD&A on material trends and uncertainties and events that are reasonably likely to occur. She explained that the MD&A disclosures need to include more analysis and should specifically address the “why behind the why.” Ms. Long noted that, in particular, companies need to improve their liquidity and capital resources disclosure. Disclosure regarding the company’s known material cash requirements and commitments, sources of cash, material financing arrangements, debt instruments, debt covenants, guarantees and cash management policies should be provided. Ms. Long noted that the liquidity section will be a focus of her staff in 2009. Risk factor disclosure may also need to be revised or expanded to address current economic conditions.

XBRL Mandate. In December 2008, the SEC voted to require public companies and mutual funds to provide financial statements, notes and schedules in an interactive data format which uses eXtensible Business Reporting Language (“XBRL”). Companies who file using U.S. GAAP with a public float above $5 billion will be required to make XBRL filings for their first quarterly report for fiscal periods ending on or after June 15, 2009. The remaining companies who file using U.S. GAAP will by required to make XBRL filings on a phased-in schedule over the next two years. Companies reporting in IFRS issued by the International Accounting Standards Board will be required to submit XBRL filings starting with fiscal years ending on or after June 15, 2011. As adopted, the regulations initially exempt machine readable XBRL data from antifraud claims, so long as the errors were made in good faith. The limited liability provision will be phased out over a two-year period for each company and will be terminated completely on October 31, 2014. The SEC’s adopting release will be posted on the SEC’s website. A copy of the SEC’s news release is available at:

Disclosure Considerations for Smaller Companies

In late 2007, but effective in 2008, the SEC combined the small business issuer reporting system with Regulation S-K, eliminating all SB forms. The modified definition of companies that qualify as “smaller reporting companies” (instead of the previous “small business issuer” under Regulation S-B) under the new rules now more closely parallels the definition of companies that are not accelerated filers. A company now qualifies for the reduced disclosure requirements for smaller reporting companies if its public float was less than $75 million as of the end of its second fiscal quarter or, if it has failed to qualify as a smaller reporting company in the past, less than $50 million as of the end of its second fiscal quarter. This effectively lower standard of entry into the streamlined reporting requirements available to smaller reporting companies, together with a general decline in market capitalization for many companies, has caused a number of reporting companies to be subject to fewer disclosure obligations. These companies will need to consider whether they will continue to provide the same level of disclosure as accelerated filers in order to meet perceived market demand for all of the information the SEC might request for larger companies, or potentially save expense and provide the lesser level of disclosure permitted by the rules.

In June 2008, the SEC approved a one-year extension of the compliance date for smaller public companies to file an auditor’s attestation report of the company's internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002. These filers will now be required to file an auditor’s attestation report with the Form 10-K filed for a fiscal year ending on or after December 15, 2009. See SEC Release No. 33-8934 available at: