On February 20, 2013, SEC Commissioner Luis A. Aguilar delivered a speech regarding the need for more robust disclosure in proxy statements and highlighted areas in which disclosure can be substantially improved.

Mr. Aguilar acknowledged that many public companies have made a good effort to enhance the quality of their proxy statements in recent years, but he encouraged companies to view proxy and other disclosure requirements as an opportunity to engage and inform their shareholders, rather than merely a box to be checked.

Compensation Risks

Although, by its terms, Item 402(s) of Regulation S-K under the Securities Act requires a narrative discussion of a company's compensation policies and practices relating to risk management only "to the extent" that risks arising from the issuer's compensation policies and practices are "reasonably likely to have a material adverse effect," Mr. Aguilar advised that it would be prudent and appropriate for all issuers to discuss the role of compensation in risk management in their proxy statements.

Mr. Aguilar provided several examples of situations that may warrant additional disclosure. First, he explained that the relative pay of different classes of employees, such as the ratio between CEO compensation and median pay, can create risks to an enterprise, including the risk of employee, customer and shareholder discontent. Second, he noted that decisions regarding executive compensation may also affect succession planning and related risks. Third, he advised issuers to consider including enhanced disclosure in the proxy statement regarding the relationship between executive compensation actually paid and a company's long-term performance. With respect to this last point, Mr. Aguilar advised that policies and practices that reward management despite poor performance, or that result in a poor correlation between pay and performance, may adversely affect risk management by sending the wrong signals to a company's executives and by impeding the board's ability to exercise the oversight for which it is responsible.

Leadership Structure and Risk Oversight

Mr. Aguilar also addressed Item 407(h) of Regulation S-K, which requires disclosure of the board's leadership structure, the board's role in risk oversight of the issuer, and the effect that such role has on the board's leadership structure. Mr. Aguilar noted that boilerplate responses are often given to this item that fail to consider the specific characteristics or circumstances of the registrant. He urged issuers to provide disclosure as to why the governance structures and practices they have developed are best suited to their companies.

Item 407(h) also requires companies to describe the role of the board of directors in the oversight of risk. Given the magnitude of the financial crisis from 2007-2009, Mr. Aguilar explained that it would be difficult to overemphasize the importance that investors place on questions of risk management. He noted that some questions that an issuer should consider answering include:

  • Has the board set limits on the amounts and types of risk that the company may incur?
  • How often does the board review the company's risk management policies?
  • Do risk managers have direct access to the board?
  • What specific skills or experience in managing risk do board members have?

Mr. Aguilar commented that issuers that offer boilerplate in lieu of a thoughtful analysis of questions such as these have not fully complied with the SEC's proxy rules and are missing an important opportunity to engage with investors.

Board Diversity

Proxy rules require companies to disclose whether, and if so how, a corporate board or nominating committee considers diversity in identifying nominees for director. Mr. Aguilar explained that to truly meet the needs of investors, a proxy statement would need to state the following:

  • the gender and racial or ethnic background of incumbent directors and nominees
  • whether or not the board or nominating committee takes such aspects of diversity into account in identifying and/or evaluating potential board candidates
  • how the board defines diversity

Mr. Aguilar commented that if a company has no women or persons of color on its board, it should state whether or not it has considered increasing the size of its board to enhance diversity — and if not, why.

Corporate Political Spending

Mr. Aguilar explained that investors have been seeking information on how corporations use corporate resources for political purposes, and a rulemaking petition filed with the SEC by a coalition of law professors seeking public disclosure of such payments has received over 380,000 letters of support. Mr. Aguilar agreed that disclosure regarding political spending would enhance the ability of shareholders to make informed voting and investment decisions and commended the 100-plus companies that have begun to provide this information in their proxy statements voluntarily.

A full transcript of the speech can be found here: