On March 23, Securities and Exchange Commission Chairman Christopher Cox spoke at the Second Annual USC Corporate Governance Summit regarding his views on issuer compliance with the narrative disclosure requirements of the Compensation Discussion and Analysis (CD&A) section now required in proxy statements. Chairman Cox expressed the strong view that CD&A disclosure is too long, insufficiently clear and “isn’t anywhere close to plain English.” He had hoped CD&A would in most cases be no more than a few pages long, but, according to an analysis of 40 companies’ CD&A by investor relations firm Clarity Communications, the average length of CD&A disclosure was 5,472 words, “more than the U.S. Constitution”, in Cox’s words.
The Clarity Communications study used three “readability metrics” commonly applied to journalistic publications such as Reader’s Digest and the Wall Street Journal. The first metric, the Gunning Fog Index, developed in 1952 to measure the readability of English prose, recommends that writing aimed at a general audience should have a Fog Index score of less than 12. The Wall Street Journal, with an educated general audience, scores just under 12; Reader’s Digest, with a broader audience, scores approximately an 8. The average CD&A section scored 16.45, roughly equivalent to a Ph.D dissertation. The other metrics, the Flesch Reading Ease test and the Flesch-Kincaid readability algorithm, judged current CD&A disclosure to be similarly unreadable.
Historically, Chairman Cox noted, prospectus and proxy statement disclosure was shorter and less cumbersome, but has grown longer and more complex as lawyers, underwriters and companies grew more concerned with protecting against lawsuits and other liability than with readability. Cox notes this approach has left the average investor poorly served. Chairman Cox closed his remarks on CD&A by stating the SEC was “dead serious about shedding 70 years of accumulated bad habits in writing.” He did not comment on or disclose the Fox Index score of the SEC’s 436-page release on the new executive compensation disclosure regulations which set forth the CD&A requirements.