Proxy materials prepared for the 2011 proxy season may benefit from the numerous comments of the SEC staff relating to disclosures in response to the “proxy disclosure enhancements” adopted in December 2009. There are lessons to be learned from the staff’s comments that should be considered as the preparation of the 2011 proxy materials gets under way. Summarized below are some of the staff’s comments on these areas during 2010.
Qualifications of Directors. Item 401(e) of Regulation S-K requires companies to “briefly discuss” in a proxy statement for each director, whether standing for election or not, and each nominee for election “the specific experience, qualifications, attributes or skills that led to the conclusion that the person should serve as a director for the registrant at the time that the disclosure is made, in light of the registrant’s business and structure.” A common theme in the staff’s comment letters during 2010 was that it was not looking for a narrative disclosure of a director’s resume, but rather a specific enumeration of the aspects of the individual’s experience, qualifications, attributes or skills that led to the conclusion that the person should serve on the board at the time that a filing containing the disclosure is made:
We note your disclosure that outlines the “experience, qualifications, attributes and skills” the Board considered in nominating these individuals as directors of the Company. However, your disclosure identifies the principal occupations and employment of each of your directors and the skills of only some of the individuals.
In future filings, please expand your disclosure with respect to each director to specifically discuss what aspects of the individual’s experience led the board to conclude that the person should serve as a director for the Company, as well as any other relevant qualifications, attributes or skills that were considered by the board. See Item 401(e) of Regulation S-K.
In future filings, please disclose for all nominees and directors, even those not up for re-election in a particular year, the specific experience, qualifications, attributes or skills that led to the conclusion that the person should serve as your director at the time that the disclosure is made, in light of your business and structure.
Accordingly, it would not be sufficient to disclose simply that a person should serve as a director because he or she is an audit committee financial expert or some other relevant expert. Instead, a company should describe the specific experience, qualifications, attributes or skills that led the board to conclude that this particular person should serve as a director at the time that a filing containing the disclosure is made. In this regard the SEC has commented on a few egregious examples of inadequate disclosure, mentioning a company that cited the “integrity” of each director as the sole qualification.
Diversity. Item 407(c)(2)(vi) of Regulation S-K requires a company to disclose in its proxy statement whether and, if so how, the nominating committee or the board (if there is no nominating committee) considers diversity in identifying director nominees. Neither the rule nor the adopting release include any definition of diversity, nor do they limit diversity to simply racial, gender, ethnic or nationality criteria. Comments on 2010 proxy statements emphasized that the SEC staff is not satisfied with a mere statement that diversity is considered by the nominating committee or the board when recommending director nominees.
Please expand your disclosure on page 7, or elsewhere as appropriate, to address whether, and if so how, your Corporate Governance Committee considers diversity in identifying nominees for director. We note your statement in the fourth paragraph on page 7 that diversity is a factor in Board nominee selection, but you do not address how this factor is considered. Refer to Item 407(c)(2)(vi) of Regulation S-K.
We note your disclosure that the committee may consider many specified factors in its evaluation of candidates for board membership, as well as “other relevant factors including diversity.” In future filings, please discuss how the nominating committee (or the board) considers diversity in identifying nominees for directors. If the nominating committee has a policy with regard to the consideration of diversity in identifying director nominees, describe how this policy is implemented, as well as how the nominating committee (or the board) assesses the effectiveness of its policy. Please refer to Item 407(c )(2)(vi) of Regulation S-K. Please show us supplementally what your disclosure would have looked like in this proxy statement in response to this comment.
As the foregoing comments illustrate, the staff expects to see more detailed disclosure with respect to how diversity is considered when identifying nominees for director. Additionally, there should be disclosure regarding whether or not the company has a policy with regard to the consideration of diversity in identifying director nominees, and a description of how the policy is implemented and how the effectiveness of the policy is assessed.
Board Leadership Structure. Item 407(h) of Regulation S-K requires a company to “[b]riefly describe the leadership structure of the registrant’s board, such as whether the same person serves as both principal executive officer and chairman of the board, or whether two individuals serve in those positions; specific information disclosure about the company’s board leadership structure, such as whether the company has chosen to combine or separate the chairman of the board and chief executive officer positions; and why the company believes the leadership structure of its board is the most appropriate for the company at the time of the filing.” The staff’s comments on leadership structure disclosure consistently requested that companies explain why the leadership structure it has is in the best interest of stockholders, given the company’s specific characteristics or circumstances:
We note your statement that "[your] board of directors believes its leadership structure is appropriate for a controlled company under the NYSE listing standards." With a view towards future disclosure, please tell us why the board holds this belief. Please refer to Item 407(h) of Regulation S-K.
With a view toward disclosure in future filings, please explain to us the reasons you determined that your leadership structure (i.e., separating the roles of chairman and chief executive officer) is appropriate given your specific characteristics or circumstances. In addition, please describe the services your chairman provides and the role he performs in his position as an employee with the company.
Compensation Risk Management. Item 402(s) of Regulation S-K requires a company to “discuss” in its proxy statement “the registrant’s policies and practices of compensating its employees, including nonexecutive officers, as they relate to risk-management practices and risk-taking incentives.” Companies must also discuss and analyze their broader compensation policies and overall actual compensation practices for all employees generally, including nonexecutive officers, if risks arising from those compensation policies or practices are reasonably likely to have a material adverse effect on the company. While no disclosure is required if the company does not believe its compensation policies are reasonably likely to have a material adverse effect on the company, the staff frequently requested information from companies regarding the process undertaken to reach their conclusion, especially when there was no disclosure:
We note that you do not have any disclosure indicating that your compensation policies and practices for its employees are reasonably likely to have a material adverse effect on you. Please advise us of the basis for your conclusion under Item 402(s) of Regulation S-K that disclosure is not necessary and describe for us the process you undertook to reach that conclusion.
We note that you have elected to provide negative disclosure in response to Item 402(s) of Regulation S-K. In future filings, if you continue to provide this disclosure please follow the standards provided in the Item. For example you discuss whether the “design and operation of your incentive compensation arrangements” “might encourage inappropriate risk-taking that could have a material adverse effect on the company.” Item 402(s) contemplates a different analysis, discussing the extent that risks arising from a registrant’s compensation policies and practices for its employees are reasonably likely to have a material adverse effect on the registrant.
The impact of these comments may be to drive companies to include a description of the process undertaken by the compensation committee in assessing the need for disclosure regarding this item.