SEC open meeting--proposed amendments to proxy disclosure

By:  Cydney Posner

At an open meeting today, following a lengthy encomium by Chairman Cox regarding departing Corp Fin director Alan Beller, the SEC voted to propose amendments to the proxy disclosure requirements for executive and director compensation, related-party transactions, securities ownership of officers and directors, director independence and other corporate governance matters. The proposed amendments also require that most of the disclosure in proxy and information statements be provided in plain English. These proposed amendments represent the first time in 14 years that the SEC has revisited executive comp disclosure. Commissioners emphasized, perhaps in response to the provocative NYT column copied below, that the role of the SEC is to regulate disclosure of compensation, not to control the amounts paid. One concern raised (and discussed in the attached column) was whether the extensive disclosure would have the effect of a creating a compensation "race to the top."

The proposal is designed to refine tabular disclosure and improve narrative disclosure. However, in response to a question from Commissioner Glassman, Beller admitted that he saw no way to eliminate the complexity of the proposal. First, in replacement of the comp committee report and the performance graph, the proposal would require a new overview, referred to as "Compensation Discussion and Analysis," that, like MD&A, would include a discussion and analysis of the objectives of the company's programs, its various elements, the types of events the company has elected to reward or not to reward, how the amounts were determined and the reasons the company chose to pay the disclosed amounts. As opposed to the report and graph, however, the new section would be "filed," not "furnished," and covered by the officers' SOX certifications.

The summary compensation table would now cover the CEO, CFO and the three other highest paid executive officers based on total compensation, not just salary and bonus as is currently required. Compensation for up to three non-executive officers would also have to be disclosed if higher than the executive officers' compensation; however, the individuals could be identified only by job description and not by name (although it was unclear if this information was to be provided in the table or separately.) The first column of the table would disclose total compensation, which would be the sum of all the other columns. The next columns would include salary and bonus, the dollar value of options granted in the year based on full grant date fair value under FAS 123R used for financial statement purposes, long-term incentives not tied to equity (shown when earned) and all other compensation not expressly required by the other tables, such as increases in actuarial value of defined benefit plans and contributions and earnings under defined contribution plans. The intent is to prevent the exclusion of any compensation. ("If it looks like compensation and walks like compensation, it’s compensation," was how Commissioner Glassman phrased it.) One question raised regarding option disclosure was whether the calculation should assume that executives remain employed through the entire vesting period or use the forfeiture assumptions employed by the company generally in its financial statement calculations. The new table would require the identification of all perquisites aggregating over $10,000, down from the current $50,000. The release will include interpretive guidance regarding perquisites. The demarcation line will be whether the benefit was "integrally and directly related to the performance of the officer's duties." The table would be followed by narrative required to explain the information in the table.

Another table would disclose outstanding equity awards (described by Beller as intended to capture the officers' "skin in the game"), including holdings, strike prices, vesting and similar provisions. Another table would disclose option exercises and vesting of restricted stock, the amounts realized, as well as, for comparison purposes, the grant date fair value. Significant changes were proposed for the table disclosing post-employment compensation, which would now include benefits under qualified and non-qualified plans. The disclosure would require a description of any other arrangements related to compensation following a change of control, termination of employment, change in job responsibilities and the like. The amounts to be paid would be required to be quantified based on disclosed assumptions.

Director compensation would now be required to be disclosed in a table comparable to the Summary Compensation Table for executive officers, except that disclosure would be required for only one year.

Disclosure for related-party transactions has purportedly been simplified, but would include disclosure of the company's policy for approval of related-party transactions and would raise the disclosure threshold from $60,000 to $120,000. Disclosure regarding debt would take into account the changes required by SOX 402.

The new rules would also require disclosure regarding the compensation committee and its members comparable to that required for the audit and nominating committees, including procedures followed and material factors considered by the Board that could relate to independence of members outside of the bright line requirements for independence.

The proposal also would amend Form 8-K to require disclosure in the event of resignation, termination and appointment of officers, but as to other agreements, would apply only to Named Executive Officers.