SEC Commissioner Luis A. Aguilar recently issued a statement in support of SEC corporate governance rules and elaborated on his views about disclosure topics that he believed should be a point of emphasis in 2013. Commission Aguilar noted that SEC rulemaking in recent years focused on disclosures about compensation policies, the qualifications of board members, the board's leadership structure and role in risk oversight, and board diversity policies.
However, Commission Aguilar believes that many public companies "continue to fall short of providing the robust, clear, and useful disclosure required by law. Some companies appear to view our proxy and other disclosure requirements as a box to be checked, or an obstacle to be overcome, rather than an opportunity to engage and inform their shareholders."
Commission Aguilar believes that the compensation risk disclosure required by 2009 amendments to Item 402(s) of Regulation S-K is one such area in need of improvement. "Although, by its terms, this rule requires such disclosure only 'to the extent' that risks arising from the issuer's compensation policies and practices are 'reasonably likely to have a material adverse effect,' it would be prudent and appropriate for all issuers to discuss the role of compensation in risk management in their proxy statements."
The SEC has yet to propose disclosure rules mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") regarding pay-for-performance and CEO-to-employee pay ratios. Commission Aguilar suggests that this information is inherently relevant to an understanding of compensation policies and companies "should also consider including enhanced disclosure in the proxy statement regarding the relationship between executive compensation actually paid and a company's long-term performance."
Commission Aguilar also identifies board leadership structure disclosure as largely deficient in proxies. "Many issuers provide only minimal discussion in response to the board leadership question. If the same person serves as both principal executive officer and chairman of the board, the reason given is often simply 'efficiency,' 'streamlined decision-making,' or 'depth of knowledge.' If the CEO and chairman positions are separated, the proxy statement might say something to the effect that separating the two positions permits the CEO to concentrate on 'day-to-day business,' while allowing the chairman to lead the board in providing 'independent oversight.' Although Item 407(h) specifically requires the disclosure to indicate why the registrant has determined that its leadership structure is appropriate 'given the specific characteristics or circumstances of the registrant,' such analysis isoften missing."
Although not specifically covered by any current disclosure rules, Commissioner Aguilar also notes that "investors have also been clamoring for information on how corporations use corporate resources for political purposes." A recent rulemaking petition filed with the SEC by a coalition of law professors requests the SEC to adopt rules requiring public disclosure of political contributions. Commissioner Aguilar observed that this petition has received "an unprecedented display of support" with over 380,000 letters of having been submitted to the SEC.
As companies and their disclosure committees continue to react and respond to SEC staff comments on existing disclosure rules, they should begin to consider whether and how they would comply with disclosure rules regarding political contributions.