An issue that has been flying below the radar for a couple years seems to be elbowing its way into prominence. Recently, I have seen two blog posts and an article in Agenda magazine regarding the use of non-GAAP performance measures by publicly traded companies. I found the content to be particularly interesting.
- In July 2017, the labor union group, Change to Win Investment Group, announced that it filed a complaint with the SEC urging the agency to investigate the executive compensation disclosure of a major wireless carrier and requesting that the SEC compel the issuer to provide a clear and comprehensible description of how short term incentive amounts paid to the issuer’s NEOs were derived from the issuer’s performance metrics (see Liz Dunshee’s post here and a draft of the complaint here).
- In September, a few MIT professors published a study indicating their belief that compensation committees use opaque disclosures to hide non-GAAP adjustments to justify higher levels of executive compensation (see Broc Romanek’s posts here and a copy of the research here).
Serious stuff if they could prove it. And adjustments can raise issues under Section 162(m), which we will discuss in future posts.
As readers know, we have previously blogged about how the SEC has increased its focus regarding non-GAAP disclosures in SEC disclosures (see The Biggest Issue in Proxy Drafting for 2017 Has Been...). However, based on our understanding of comments during the most recent proxy season, it appears that the SEC limited its focus to disclosures regarding non-GAAP measures in earnings releases and financial statements, with less emphasis on a review of non-GAAP disclosures in proxy statements. The blog posts suggest that other stakeholders may be heightening the emphasis on this topic.