On December 16, 2009, and just in time for the 2010 proxy season, the Securities and Exchange Commission adopted new disclosure rules to provide investors with a better understanding of the compensation practices and corporate governance of public reporting companies. The SEC believes these changes will help investors make more informed voting decisions. The amendments adopted include the following:
- Impact of Compensation Practices on Company's Risks - Item 402 of Regulation S-K is amended to require disclosure of compensation policies and practices applicable to all employees (not just the named executive officers), if those policies and practices create risks that are reasonably likely to have a material adverse effect on the company. The "reasonably likely" threshold is different from the "materiality" threshold set forth in the proposing release. This additional disclosure will not be included in the Compensation Discussion and Analysis. Smaller reporting companies will not be required to provide this disclosure.
- Full Grant Date Value of Equity Awards - The Summary Compensation Table and Director Compensation Table will require disclosure of the full grant date fair value for stock options and stock awards, calculated in accordance with FASB 123(R) (now known as ASC 718). These compensation tables currently require disclosure of the dollar amount recognized for all outstanding awards for financial statement reporting purposes in the fiscal year. This represents a shift back to use of a value that the SEC believes will provide more useful information to investors. For the 2010 proxy season, companies will be required to recalculate the equity awards amounts for the previous years included in the Summary Compensation Table and Director Compensation Table to provide consistent disclosure.
- Qualifications of Directors - Item 401 of Regulation S-K is expanded to require additional disclosure, on a person-by-person basis, of the experience, qualifications, attributes, or skills that qualify a director or director-nominee to serve on the board. This disclosure will be required on an annual basis for all directors, regardless of whether the director is up for reelection. Companies must also disclose, for each director or director-nominee:
- All directorships of public companies held during the past five years; and
- Legal proceedings involvement during the preceding 10 years (the current requirement is five years). The SEC also added some additional legal proceedings to the disclosure requirement—proceedings involving mail fraud, wire fraud, other forms of fraud, violations of securities, commodities, banking and insurance laws, and disciplinary actions by exchanges and regulatory bodies, including self-regulatory organizations.
- Diversity in the Nominating Process - In response to comments received, the SEC is revising Item 407 of Regulation S-K to require disclosure of whether and how a nominating committee considers diversity in making nominations to the board. The SEC chose not to define diversity, but rather will allow companies to adopt their own definition. Companies will be required to disclose whether diversity is a factor in considering candidates for nomination to the board, how diversity is considered in that process, and how the company assesses the effectiveness of its policy for considering diversity.
- Leadership Structure - Item 407 of Regulation S-K will require enhanced disclosure of a company's leadership structure, including a discussion of whether and why the roles of the chief executive officer and chair of the board are held by one individual or split; if the roles are combined, whether the board has a lead independent director and what functions that director serves; and why this is the best leadership structure for the company at that time.
- Oversight of Risk - Each public reporting company will be required to disclose how its board oversees risk, including whether the board as a whole or a committee of the board oversees risk and, if risk oversight is divided among a number of committees, how such oversight is coordinated.
- Compensation Consultants - Additional disclosure will be required of the fees paid to compensation consultants in certain circumstances. Disclosure is required (1) if the board or compensation committee has its own compensation consultant that recommends the amount or form of executive compensation, and that consultant or its affiliates provide other services to the company that exceed $120,000 during the fiscal year, or (2) if the board or compensation committee does not have its own compensation consultant, but the company's compensation consultant or its affiliates provide recommendations regarding executive compensation and also provide other services to the company that exceed $120,000 during the fiscal year. In such cases, the company must disclose:
- the aggregate fees paid for both executive compensation-related services and all other services;
- a description of the nature and extent of the other services; and
- the decision-making process regarding how the consultant or its affiliate was engaged to perform the other services.
- There is a limited exception to this rule if the compensation consultant's only role is recommending the amount or form of executive compensation in connection with consulting on broad-based plans that do not discriminate in favor of executives (such as 401(k) plans and health and welfare plans) or if the role is limited to providing survey information that is not customized to the company.
- Reporting Shareholders' Meeting Results - In order to hasten the reporting of results of shareholders' meetings, this reporting requirement is moved from its current location to Form 8-K. Under this requirement, a company needs to report the results of any shareholder vote within four business days after the end of the meeting. If the results are not finalized within this time frame (for example, in contested elections), the company must report preliminary results within such four day period and then file an amended Form 8-K once the results are final.
The new rules will be applicable to reporting companies for the upcoming 2010 proxy season. In preparation, we recommend that you review your Directors' and Officers' Questionnaires and update them as necessary to reflect the new disclosure requirements. We also encourage you to review your polices, practices, and procedures regarding risk oversight and management, the director nomination process, and other corporate governance matters. We are available to help with this process.