As you read this, annual meeting season is in full swing. One of the traditional hallmarks of the season is the annual proxy report which firms distribute in advance of the annual meeting. The ostensible purpose of the report is to solicit votes for the slate of directors, usually incumbents, to be elected at such annual meeting. But the broader purpose of the proxy of course is to describe the leadership of the firm, including such things as corporate governance practices, the overall structure of the board of directors, and the background of both management and the board of directors, including their compensation and real and potential conflicts of interest.
The dramatic business environment over the last few years has led to numerous changes in both the form and the style of proxy disclosures. There is more emphasis now, for example, on what is called “transparency” for shareholders. In practice, this means more disclosures related to compensation and conflicts.
All of this makes now a great time to consider current best practices for shareholder disclosures. For large companies, including financial institutions, that isn’t much of a chore because most are SEC reporting companies and shareholder disclosures are largely a question of interpreting and following the requirements of applicable regulations as they change over time.
For community banking companies, however, providing current annual shareholder disclosures can be challenging because there is relatively little guidance available and little in the way of applicable regulation. The problem is exacerbated for small companies that are not reporting companies but in fact have tens if not hundreds of shareholders. In fact, many such companies make few or no disclosures. This practice ignores the real possibility of potential liability for directors and management for missing or misleading disclosures under the securities laws, both state and federal, even though those firms are not technically reporting companies.
Recently, the Securities and Exchange Commission issued a small entity compliance guide to help small companies comply with new proxy statement disclosure rules effective February 28, 2010, requiring information about board structure, corporate governance, director qualifications, and compensation. Smaller firms, even those to which the rules are not applicable, should consult the guide during proxy preparation in the future.
In fact, the guide does not specifically define what constitutes a small entity, but in general the SEC characterizes small entities as those that have a public float of less than $75 million (computed by multiplying the total number of outstanding shares held by non-affiliates by the stock price) or annual revenues of less than $50 million. This guide is a helpful place for smaller organizations such as community banks to go to for suggestions as to what constitutes an appropriate level of disclosure.
For example, the guide describes the requirements for shareholder notifications after the results of a shareholder vote at an annual meeting. Of course, many community banks do not provide notifications of shareholder results after an annual meeting. Going forward, small reporting companies’ shareholder voting results must now be disclosed on SEC Form 8-K within four business days after the shareholder meeting at which the vote was held (the previous rule required disclosure on the next Form 10-Q or 10-K for the time period in which the vote took place).
Here is an outline of how the guide summarizes the new proxy statement disclosure rules that apply to small companies:
Disclosures Regarding Board of Directors
- Disclose for each director and nominee the particular experience, qualifications, attributes or skills that led the company’s board to conclude that the person should serve as a director of the company.
- Disclose any public company directorships held by each director and nominee during the past five years (the previous rule required disclosure of current positions only).
- Disclose a newly expanded list of legal proceedings involving directors and nominees such as any proceedings based on violations of banking or insurance laws and any disciplinary sanctions imposed by self-regulatory organizations. Such disclosures must cover the past ten years (the previous rule was concerned with only the past five years).
- Disclose how diversity is considered in identifying director nominees (the term “diversity” is not defined).
- Describe the board’s leadership structure, including whether the same person serves as both chairman and chief executive officer and whether the board has a lead independent director and why such structure is appropriate.
- Describe the extent of the board’s role in the risk oversight of the company and what effect such role has on the board’s structure.
Disclosures Regarding Compensation
- The value of awards of stock and options should be reported in the summary compensation table as the aggregate grant date fair value in accordance with FASB ASC Topic 718 (the previous rule required disclosure of the amount recognized for financial statement reporting purposes).
- For stock and option awards that are subject to performance conditions, disclose in the summary compensation table the value at the grant date based upon the probable outcome of such conditions and disclose by footnote the grant date value of the award assuming the highest level of performance conditions will be achieved.
- If the board has engaged a compensation consultant for compensation advice and the consultant also provides additional services in excess of $120,000 per year, disclose the fees for the additional services and the compensation services. Disclose whether the decision to hire the consultant was made or recommended by management and whether the board approved of such additional services.
The small entity compliance guide is available on the SEC’s website at www.sec.gov/rules/final/2009/33-9089-secg.htm.