There are a number of new rules and other considerations that will affect your disclosures in 2010. These include the following changes made by the Securities and Exchange Commission (“SEC”) and the New York Stock Exchange (“NYSE”) and additional disclosure concerns given the recent economic environment. While it is still early for proxy statements to be filed that are required to comply with the new SEC rules, some companies, such as Eli Lilly and Company, Analog Devices, Inc., Weyerhaeuser Company, Synovus Financial Corp. and Huntington Bancshares Incorporated, have voluntarily provided these disclosures.
Director and Nominee Disclosures. Companies must include additional information regarding their directors and nominees, including the following:
- the particular experience, qualifications, attributes or skills that led the board to conclude that the person should serve as a director for the company,1
- other directorships held during the past five years, rather than only those directorships currently held,2 and
- involvement in specified legal proceedings during the past ten years, rather than the past five years, and additional categories of legal proceedings requiring disclosure.3
Diversity. Companies now must disclose whether and how its nominating committee considers diversity in identifying director nominees and how the committee implements and assesses the effectiveness of its diversity policy, if any. “Diversity” is not defined, but the SEC notes that “companies may define diversity in various ways, reflecting different perspectives. For instance, some companies may conceptualize diversity expansively to include differences of viewpoint, professional experience, education, skill and other individual qualities and attributes that contribute to board heterogeneity, while others may focus on diversity concepts such as race, gender and national origin.”4
Board Leadership Structure and Role in Risk Oversight. Companies are required to briefly discuss: the leadership structure of the board, including whether and why it combines or separates the principal executive officer and board chairman positions; whether and why it has a lead independent director and the role played by such director; and the reasons the company believes this structure is appropriate. In addition, the rule requires companies to include information about the board’s role in risk oversight.5
Compensation and Risk Disclosures. Companies, other than “smaller reporting companies,” must discuss their compensation policies and practices applicable to all employees (not just executives) as they relate to the companies’ risk management and risk-taking incentives, to the extent that the risks arising from those compensation policies and practices are “reasonably likely” to have a material adverse effect. If a company determines that these risks are not reasonably likely to have a material adverse effect on the company, no disclosure is required.6
Summary Compensation Table Revisions. Stock and option awards in the summary compensation table and director compensation table are now calculated based on the aggregate grant-date fair value of the awards rather than the dollar amount recognized for financial statement purposes. Companies also must recalculate amounts in the stock and option awards columns and the total compensation columns for each preceding fiscal year required to be included in the summary compensation table.7
Compensation Consultants. In addition to the current requirement that companies describe a compensation consultant’s role in determining executive or director compensation, companies also must disclose in most circumstances fees paid to such compensation consultant when more than $120,000 is paid to that consultant for non-executive compensation consulting services.8
Reporting of Voting Results on Form 8-K. Companies must now disclose the results of shareholder votes in a Form 8-K within four business days after the meeting at which the vote was held, rather than in the company’s next Form 10-Q or Form 10-K.9
Elimination of Broker Discretionary Voting in Director Elections. In previous years, a broker who did not receive voting instructions from a beneficial owner could exercise discretionary voting authority with respect to matters deemed “routine” by the NYSE, including uncontested director elections. Uncontested director elections are now “non-routine” matters, for which broker discretionary voting is not permitted.10 This change will affect all public companies, not just those listed on the NYSE, and could lower the number of votes received and impact the establishment of a quorum. Companies that are not already doing so should consider including at least one “routine” item on the meeting agenda (such as ratifying auditor appointments).
Risk Factor Disclosures. Although there have been no amendments to the SEC’s disclosure requirements regarding risk factors, companies in all industries may find it necessary to reevaluate their risk factors in light of the recent economic environment.
Non-GAAP Financials. In January 2010, the SEC revised its interpretations relating to the use of non-GAAP financial measures. Among other things, the SEC confirmed that companies may adjust for recurring as well as nonrecurring items in non-GAAP financial measures as they deem appropriate and are not required to limit their non-GAAP financial measures to those they use in managing their business.11
Upcoming XBRL requirements. Large accelerated filers must file their financial statements in an interactive data format, or Extensible Business Reporting Language (XBRL), for fiscal periods ending on or after June 15, 2010, and all other filers will be subject to this requirement for fiscal periods ending on or after June 15, 2011.
“Say on Pay.” Financial institutions with TARP funds must include a separate advisory vote on the compensation of their executives. The SEC has amended its proxy rules to provide that the inclusion of such “say on pay” proposals will not require a preliminary proxy statement filing. However, non-TARP recipients who voluntarily include a “say on pay” proposal will still need to file a preliminary proxy statement.
Climate Change Disclosure. The SEC’s new interpretive release provides guidelines on disclosure relating to climate change in a company’s risk factors, business description, legal proceedings and management’s discussion and analysis. The release does not impose any new legal requirements or modify existing ones, but instead highlights climate-related issues that may trigger disclosure, including the impact of legislation and regulation, impact of international accords and treaties, indirect consequences of regulation or business trends and physical impacts of climate change.12