Most public companies will need to provide new disclosures about corporate governance, director qualifications and compensation matters in proxy statements for their 2010 annual meetings. The SEC has just adopted new rules that apply to filings made on or after February 28, 2010.1 (The Adopting Release does not explicitly address transition timing questions, so we expect further clarification from the SEC.) The new disclosures will appear primarily in proxy statements but will also apply to some registration statements and Forms 10-K. There is also a new Form 8-K disclosure requirement.
Compliance with the new rules will require companies to gather and describe a significant amount of information about their policies and practices and their directors, and may require meaningful board or committee involvement. In a number of cases, boards or committees will need to assess whether policies should be adopted or revised in order to support or enhance the new disclosures. The annual D&O Questionnaire will need revising. Given the short time frame for compliance, companies should promptly review their schedules for board and committee meetings, as well as for annual meeting preparation, to accommodate any additional efforts that will be required.
The table below summarizes the new disclosure requirements and suggests actions for companies to take now.
Click here to view table
Disclosure Considerations re: Risks Arising from Compensation Policies and Procedures
While the situations requiring disclosure will vary depending on the particular company and compensation policies and practices, situations that may trigger disclosure include, among others, compensation policies and practices:
- at a business unit of the company that carries a significant portion of the registrant’s risk profile; QQ
- at a business unit with compensation structured significantly differently than other units within the registrant; QQ
- at a business unit that is significantly more profitable than others within the registrant; QQ
- at a business unit where compensation expense is a significant percentage of the unit’s revenues; and QQ
- that vary significantly from the overall risk and reward structure of the registrant, such as when bonuses are awarded QQupon accomplishment of a task, while the income and risk to the registrant from the task extend over a significantly longer period of time.
While the information to be disclosed will vary depending upon the nature of the company’s business and the compensation approach, the following are examples of the issues that the company may need to address for the business units or employees discussed: The general design philosophy of the registrant’s compensation policies and practices for employees whose behavior
(1) would be most affected by the incentives established by the policies and practices, as such policies and practices relate to or affect risk taking by employees on behalf of the registrant, and the manner of their implementation;
(2) The registrant’s risk assessment or incentive considerations, if any, in structuring its compensation policies and practices or in awarding and paying compensation; How the registrant’s compensation policies and practices relate to the realization of risks resulting from the actions of
(3) employees in both the short term and the long term, such as through policies requiring claw backs or imposing holding periods; The registrant’s policies regarding adjustments to its compensation policies and practices to address changes in its risk profile;
(4) Material adjustments the registrant has made to its compensation policies and practices as a result of changes in its risk profile; and
(5) The extent to which the registrant monitors its compensation policies and practices to determine whether its risk manage(6) ment objectives are being met with respect to incentivizing its employees.