The U.S. Securities and Exchange Commission (SEC) proposed in July substantial revisions to its proxy rules, SEC Release No. 34-60280. The proposed amendments are intended to improve the disclosure public companies provide to their shareholders regarding compensation and corporate governance, and to clarify certain rules governing proxy solicitation.
If adopted, these amendments will increase the information included in proxy and information statements, annual reports and registration statements under the Exchange Act and registration statements under the Securities Act. The additional disclosures will also include information about the relationship of a company's overall compensation policies to risk, director and nominee qualifications, company leadership structure and the potential conflicts of interests of compensation consultants. In addition, the proposed amendments would add a new Form 8-K disclosure item for real-time reporting of proxy voting results.
Noticeable in the proposed amendments is the SEC’s focus on the importance off expertise on the boards of publicly-held corporations. While these proposed amendments do not require a expertise, it speaks volumes that the SEC has determined the expertise on the boards and the structure of the leadership are important disclosures for shareholders to consider speaks volumes.
In previous posts and in Acredula, we have stressed the importance of adding expertise on the board as an effective way to resurrect corporate America in light of the economic crisis and the finger pointing by the media, regulators and government, whether warranted to not, at the boards. The SEC’s proposed amendments further illustrates that board expertise is being monitored.
New Director and Nominee Disclosures and Board Leadership
The SEC’s proposed amendments to Item 401 of Regulation S-K will require a discussion of the particular experience, qualifications, attributes or skills that qualify each director and any nominee for director to serve as a director of the company and as a member of any committee, in light of the company's business. Essentially, a discussion of the expertise on the board. The SEC has taken the first step towards potential board expertise regulation by requiring disclosure of certain expertise on the board. The proposed amendments will also require disclosure of any directorships at public companies held by each director or nominee at any time during the past five years and lengthen the time for which disclosure of legal proceedings is required from five to 10 years.
The revisions are aimed at providing investors with more information regarding an individual's competence and character and at helping investors determine whether a particular director and the entire board composition is an appropriate choice for a given company.
Further, proposed amendments to Item 407 of Regulation S-K and Item 7 of Schedule 14A will require proxy and information statements to include disclosure of the company's leadership structure.
This new requirement will make the company explain why it believes its leadership structure is the best structure for it at the time of the filing.
Companies will also need to disclose:
- whether and why they have chosen to combine or separate the CEO and board chair positions; and
- whether and why the company has a lead independent director, as well as the specific role the lead independent director plays in the leadership of the company.
Additionally, the proposed amendments will mandate additional disclosures about the board's role in the company's risk management process and the effect of this role, if any, on the way the company has organized its leadership structure.