SEC staff and RMG Comment on "Non-Disclosure" in Proxy of Relationship of Compensation to Risk

By Cydney Posner

Last month, RiskMetrics Group, which just announced that it is being acquired by market-index firm MSCI Inc. , a former unit of Morgan Stanley, issued three new FAQs related to the SEC's new enhanced executive compensation disclosure. The FAQs address how RMG's voting policy may, in general, apply to some of the new disclosures. The three new FAQs are copied below.

With regard to the first FAQ below regarding the absence of disclosure, please note that the SEC appears to taking a similar view. It has been reported that, at a recent conference, an SEC staffer indicated that, with regard to the disclosure regarding the relationship of compensation to risk -- and even though no disclosure is required unless compensation policies and practices create risks that are reasonably likely to have a material adverse effect on the company -- it would be "helpful" if companies did describe their processes. Moreover, if companies are silent on the matter, the staff may issue a comment to probe whether or not the board was actually "introspective" in determining that no disclosure was required on the issue. It is unclear how much "process" disclosure is required to stave off an SEC comment or whether the comment is just an inquiry for the staff's benefit or will require proxy disclosure.

What will RiskMetrics be looking for in the new disclosure requirement on risks raised by compensation programs? In particular, how will RMG react to non-disclosure?

RMG understands that issuers typically do not like to provide negative disclosures (e.g., "we found no material adverse risks caused by compensation") due to concerns over liability, and the SEC generally does not require them to make such statements. As a result, some companies may choose to say nothing in their proxy statement this season with regard to searches for material adverse effects from pay which conclude there are no such risks. While RMG does not have a policy regarding non-disclosure, we advise issuers to, at a minimum, talk about their process and any mitigating features (such as claw-backs or bonus banks) that they have adopted. We view this disclosure as an opportunity for communication, not simply compliance, and we expect that shareholders will be looking for a reasonably substantive discussion of the board's process to determine whether the company's incentive pay programs might motivate inappropriate risk-taking, and what they are doing to mitigate that.

How will RMG analyze compensation consultant fee disclosures? Will RMG apply some type of formula where concerns will be raised if fees for other services exceed fees for compensation consulting?

RMG will not apply formulas or any specific policy with regard to compensation consultant fees. As this data is brand new, we will be analyzing it after proxy season and will then develop, in consultation with clients, any policy guidelines that are warranted.

Regarding the new disclosures on director qualifications, diversity policies, and board leadership and oversight of risk management, what are RMG's views and the prospects for related voting recommendations?

As with the other disclosure enhancements, it's too early to speculate about potential policy changes. We believe that shareholders will welcome additional information clarifying directors' qualifications; this information will not be determinative in any recommendation but rather will provide additional insight that may be considered in overall evaluations, as warranted. With respect to board leadership and diversity and the board's oversight of risk management, RMG has not made any policy changes related to director elections in 2010. We look forward to seeing substantive discussion of these issues, and will incorporate meaningful information into analysis of related shareholder proposals, as appropriate, although RMG policy regarding those proposals is unchanged for 2010 (see U.S. Summary Guidelines).