Corporate Governance Disclosures

Part 6, and the final installment, of our Executive Compensation Disclosure Memo Series summarizes the expanded corporate governance disclosure requirements under newly adopted Item 407 of Regulation S-K and, for small business issuers, Regulation S-B.

The new rules expand prior disclosure requirements regarding director independence and corporate governance matters, and consolidate governance-related disclosure requirements in new Item 407.

The corporate governance disclosures described below, like the Compensation Disclosure and Analysis and related executive compensation disclosures, must be provided in plain English under the new rules.

Director Independence

Item 407 requires public companies to identify each independent director and director nominee, applying the independence standards used by the board of directors in determining independence under the applicable stock exchange listing standards. A company that is not listed on any stock exchange may use the director independence standards of any national securities exchange or inter-dealer quotation system it selects, but must disclose the selected standards and apply them consistently to all directors. Public companies must also disclose any members of the audit, compensation and nominating committees who are not independent directors under the applicable committee independence standards.

In a notable change from the prior rules, the independence disclosures are now required for any person who served as a director of the company during any part of the year—even if the person no longer serves as a director at the time of filing or is not standing for reelection. However, disclosure will not be required of any director who only served during a time period prior to the company’s initial public offering.

A Company that adopts its own company-specific independence criteria elaborating on the applicable listing requirements standards (such as categorical standards encouraged by the New York Stock Exchange and the Nasdaq Stock Market) must disclose whether such standards are posted on the company’s website. If not, the company’s policies for determining independence must be included in an appendix to the company’s proxy statement at least once every three years, and for any year when the policies have materially changed since the beginning of the last fiscal year.

New Item 407 significantly expands the prior disclosure requirement by requiring, for each director and director nominee identified as independent, a description of any transactions, relationships or arrangements that were considered by the board of directors in determining the individual’s independence, but were not otherwise disclosed as related person transactions under Item 404. Thus, for example, transactions or relationships that involve dollar amounts less than those required to be disclosed under Item 404(a) may need to be disclosed if they were considered by the board in determining a director’s independence. Each specific category or type of transaction, or relationship considered must be described with sufficient detail to make its nature readily apparent.

Companies relying on an exemption from any of the director independence requirements (such as controlled companies and foreign private issuers) must disclose the basis on which the companies concluded such exemption applies.

Actions To Consider Now _ Review director independence standards and committee assignments. _ Consider adopting categorical standards to identify relationships clearly immaterial to independence in order to avoid the need to disclose consideration of trivial relationships. _ Update Director and Officer Questionnaires to provide solid basis for independence determination under applicable standards. _ Review committee charters. _ Given the option to make certain disclosures regarding independence standards and committee charters on a company’s website, consider the advisability, for the particular circumstances, of posting copies of various corporate governance documents, including the company’s charter documents.

Compensation Committee Function

The new rules require disclosures relating to the functions of the compensation committee that are similar to existing requirements with respect to the audit and nominating committees. A company must now disclose whether the compensation committee, in addition to the audit and nominating committees, has a charter. If so, the committee charters must be made available on the company’s website or attached to the proxy statement at least once every three years, or sooner if materially amended. A company that does not disclose that the committee charters are available on the corporate website must identify the most recent proxy statement that included the committee charters.

A company must now also describe the compensation committee’s processes and procedures for the consideration and determination of executive and director compensation, including:

  • the scope of the compensation committee’s authority;
  • the extent to which the compensation committee can delegate authority, including what authority can be delegated and to whom;
  • any role of executive officers in determining or recommending the amount or form of executive and director compensation;
  • the role, if any, of compensation consultants in determining or recommending the amount or form of executive and director compensation, including the identity of the consultants and whether they were engaged directly by the compensation committee or any other person; and
  • the nature and scope of the assignment given to compensation consultants, and the material elements of the instructions or directions given to the consultants.

The SEC received several public comments on the proposed rules suggesting that these requirements appeared to overlap with the newly required Compensation Disclosure and Analysis requirements. While both requirements relate to the determination of executive compensation, the SEC views them as each having a different focus. The compensation committee corporate disclosure requirement is intended to focus on the corporate governance structure that is in place for considering and determining compensation. By contrast, Compensation Disclosure and Analysis should focus on material information about the compensation policies and objectives of the company to put the quantitative compensation into perspective.

The new rules substantially streamline the Compensation Committee Report since extensive disclosure of compensation, objectives and policies is otherwise required to be filed as part of Compensation Disclosure and Analysis.

Small Business Reporting Companies And Unlisted Issuers

The corporate governance disclosure requirements discussed herein apply equally to small business issuers, except that small business issuers are not required to provide a Compensation Committee Report. Unlisted issuers should determine which stock exchange’s listing standards it will use to determine independence. While listed companies typically have compensation committee charters in place, an unlisted company that does not already have a compensation committee charter should strongly consider adopting a charter in view of the new disclosure requirements.

Compensation Committee Report

The Compensation Committee Report is no longer required to directly address compensation policies and objectives, but rather must state whether:

  • the compensation committee has reviewed and discussed the Compensation and Analysis with management, and
  • based on this analysis, whether the compensation committee recommended to the board of directors that the Compensation Disclosure and Analysis be included in the company’s proxy statement or Form 10-K, as applicable.

The Compensation Committee Report must be submitted over the names of the members of the compensation committee. The report will be treated as "furnished" rather than "filed" under the Securities Exchange Act, which means that it will not be subject to the liability provisions of Section 18 of the Securities Exchange Act. By contrast, Compensation Disclosure of Analysis is treated as "filed" and therefore is potentially subject to Section 18 liability.


This is the final installment of our six-part Executive Compensation Disclosure Memo Series outlining the executive compensation, related person transaction and corporate governance disclosure requirements adopted by the SEC for the upcoming proxy and annual report season. Prior editions and related Client Alerts include:

  • Part 2 – Compensation Discussion and Analysis
  • Part 3 – Summary Compensation Table and Director Compensation Table
  • Part 4 – Awards and Supplemental Tables
  • Related Client Alert: Changes to Form 8-K related to Executive Compensatio.

    As you move forward with your preparations for the 2007 proxy season, please feel free to contact your regular Powell Goldstein contact.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.