The SEC has adopted rules requiring additional disclosure
regarding executive and employee compensation, risk management, and
corporate governance. Effective February 28, 2010, the rules will
apply to annual reporting and proxy disclosure for calendar 2009
and thereafter. The changes are described below.
Stock and Stock Based Awards
U nder existing rules, a company includes in the Summary
Compensation Table as compensation to each named executive officer
(NEO) the value of stock and stock option awards recognized for
financial reporting purposes during each fiscal year reported in
the table. The new rule requires disclosure, instead, of the
aggregate grant date fair value of the awards, including any stock
option re-pricing, as determined for financial reporting purposes
pursuant to FASB ASC Topic 718. Awards subject to a performance
condition are to be valued reflecting the probable outcome of the
condition, consistent with ASC 718, with the maximum possible value
disclosed in a footnote. Parallel changes apply to the Director
Compensation Table.
The new reporting rules apply to each of the years reported in the
table, requiring re-computation of amounts included in previous
years for 2009 NEOs.
Compensation Consultants
In addition to disclosure currently required regarding the
company's use of compensation consultants, under circumstances
set forth below, the stated disclosure must be provided.
Who engaged compensation consultant |
Nature of services |
Additional required disclosure |
Board, compensation committee, or management |
Executive or director ("E/D") compensation only |
None |
Board or compensation committee |
E/D compensation and other services for which fees exceed $120,000 |
|
Management |
E/D compensation and other services for which fees exceed $120,000 |
|
Management and board or compensation committee engage separate consultants |
Any |
None |
Board, compensation committee, or management |
Only regarding broad-based plan that treats E/D same as salaried employees or providing non-customized information, such as surveys |
None |
Compensation risk management
Disclosure of a company's risk management practices is
required, if the company's compensation policies applicable to
employees (not limited to officers) are reasonably likely to have a
material adverse effect on the company. The new rule provides
examples of situations that might require disclosure and, in such
cases, what information might be necessary to disclose.
Additional information regarding directors and executive officers
In addition to each director's (or director nominee's)
business experience, the new rules require disclosure of the
"specific experience, qualifications, attributes or skills
that led to the conclusion that the person should serve as a
director ... at the time the disclosure is made, in light of the
[company's] business and structure." This disclosure is
required with respect to directors on staggered boards that are
continuing in office, as well as nominees for election or
re-election. The new rule does not specify the particular
information to be disclosed, but the adopting release says that, if
a person is chosen because of qualifications for a particular board
committee or expertise in risk assessment or financial reporting,
this information should be disclosed.
Disclosure of nominating committee procedures is expanded to
include whether the committee considers diversity in identifying
director candidates and how any such program is implemented. The
company is allowed to characterize diversity however it chooses,
and may include diversity of viewpoint, professional experience,
education, or other individual qualities, as well as group
identity.
The requirement to disclose a director's other public company
board memberships is extended to cover board memberships held
during the past five years.
The past period during which involvement of directors or executive
officers in specified legal proceedings must be disclosed is
increased from five years to ten. The following are added to the
kinds of proceedings that must be disclosed:
- Any judicial or administrative proceeding (not subsequently reversed) in which the person was found to have committed mail or wire fraud;
- Any judicial or administrative proceeding (not subsequently reversed) in which the person was found to have violated any law respecting financial institutions or insurance companies or any settlement of such a proceeding (other than a settlement between private litigants);
- Any disciplinary sanction or order by a securities or commodities self-regulatory organization.
Corporate governance
T he new rules require companies to disclose whether the roles of CEO and chairman of the board are held by one person or two and why the arrangement is believed appropriate for the company. If the offices are held by one person, and the board has designated a lead director, the reasons for and functions of the position must be stated.
Under the new rules, the company must also describe the board's role in oversight of credit, liquidity, operational, or other risk. Although not specified in the rule, the adopting release suggests disclosure of the relationship between the board and senior management in dealing with risk; how the board executes its function, whether, for example, by the entire board or the audit or another committee; and whether risk management personnel report directly to the board (or board committee).
Reporting of stockholder meeting results
Form 8-K is amended to require reporting of stockholder meeting
voting results within four days after the meeting. Requirements for
such reporting in Forms 10-K and 10-Q have been deleted.
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.