New Rules for Proxy
Statement Disclosures
Presentation to
The National Association of Stock Plan
Professionals, Boston Chapter
February 4, 2010
James W. Hackett, Jr.
Arthur S. Meyers
John R. Pitfield
Choate, Hall & Stewart LLP
© 2010, Choate, Hall & Stewart LLP
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CHOATE HALL & STEWART LLP
Agenda
1.
2.
3.
4.
5.
6.
7.
8.
Overview of the Rule Changes
Relationship between Compensation
Policies and Risk
Reporting of Equity Awards
Enhanced Disclosure About Directors and
Director Nominees
Board Leadership Structure
Compensation Consultants
Report of Voting Results on Form 8-K
Other Items
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1. Overview of Rule Changes
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Final rules adopted December 16, 2009
Rule changes effective February 28, 2010
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Rules apply only to companies with a fiscal year end
on or after December 20, 2009
Rules apply to a preliminary proxy filed before
February 28, 2010 if the final proxy is filed on or after
February 28, 2010
Smaller reporting companies still unique
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No change in that CD&A still not required
New rule regarding relationship between
compensation policies and risk does not apply
Otherwise, new disclosure rules do apply to smaller
reporting companies
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2. Relationship between
Compensation Policies and Risk
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Content
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Provides information about how a company’s overall
compensation policies for its employees (not limited to
NEOs) create incentives that can affect risk and
management of that risk
Disclosure to be principles-based, similar to CD&A
Separately, must provide disclosure about Board’s role in
the company’s risk oversight
Exceptions to Rule
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Disclosure only required if risks arising from compensation
policies or practices are “reasonably likely to have a material
adverse effect on the company”
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Adopting release explicitly states that a company may
conclude that its compensation policies and practices
are not reasonably likely to have a material adverse
effect on the company
Smaller reporting companies are not required to provide this
new disclosure related to compensation and risk
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2. Relationship between
Compensation Policies and Risk (cont.)
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Approaches to Disclosure
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Silence (based on the exception)
Disclosure focused on review process
Detailed disclosure
Location of Disclosure
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New section of proxy, separate from CD&A
Initially, commonly suggested to place with
Corporate Governance section of proxy
However, in C&DI Q&A No. 128A.01, states
that, although the new rules do not specify
where the risk-related disclosure should be
presented, to "ease investor understanding," the
SEC Staff recommends that it be presented
together with the company's other Item 402
(Executive Compensation) disclosures
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2. Relationship between
Compensation Policies and Risk (cont.)
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Regardless of approach taken to disclosure,
rules highlight the importance of developing (or
refining) framework for risk analysis
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Identify persons to lead the review
– Is this already part of the internal audit function?
Make a list of plans and compensation policies
– What are the plan metrics?
– How are the metrics determined?
– What role is there for subjectivity?
Assess the connection between the plans and policies and
the underlying business risks that the Company faces
– Overall pay mix
– Performance goal setting
– Performance period
– Alignment of risk and reward
– Plan administration and internal controls
– Adequacy of plan documents
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2. Relationship between
Compensation Policies and Risk (cont.)
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Framework for risk analysis (cont.)
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Determine whether compensation policies or
practices create risks that are reasonably likely
to have a material adverse effect on the
Company
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Ensure in-house counsel / outside counsel involved
Consider role of existing controls and procedures
Document the results
Develop a response for any concerns
Report to the Board
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Identified risks
Sources of risk
Recommendations on how to manage risk
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3. Reporting of Equity Awards
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Location
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Summary Compensation Table
Director Compensation Table
Content
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Disclosure of stock awards and option awards
revised to require disclosure of the aggregate
grant date fair value of awards computed in
accordance with FASB ASC Topic 718 (formerly
FAS 123R)
Change from prior rule that disclosed dollar
amount recognized for financial statement
reporting purposes for the fiscal year in
accordance with FASB ASC Topic 718
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3. Reporting of Equity Awards (cont.)
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Things to Note
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Rule change will require recomputing of prior
years’ results for current NEO’s
Performance based awards to be reported
based on probable outcome of the performance
condition(s), with maximum payout disclosed in
a footnote to the applicable table
Trends in Disclosure
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Increasing trend to highlighting direct
compensation related to fiscal period, both in
numbers of shares or units, and related
monetary value of awards
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4. Enhanced Disclosure About
Directors and Director Nominees
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Location
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General proxy statement disclosure (S-K Items 401
and 407)
Content
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Director experience
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New rule requires disclosure of the particular
experience, qualifications, attributes or skills that
led the board to conclude that each director and
director nominee should serve as a director, in
light of the company’s business and structure
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Disclosure required even for those not up for reelection
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If material, disclosure should cover more than
prior 5 years
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In C&DI Q&A No. 116.05, the Staff confirms that
disclosure should be provided on an individual
and not a group basis
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Consider placing in the context of a director’s bio
Be specific to the director’s specific experience,
qualifications, attributes or skills
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4. Enhanced Disclosure About
Directors and Director Nominees (cont.)
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Content (cont.)
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Public company directorships
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New rule requires disclosure of any public
company directorships held at any time during the
past 5 years by a director or director nominee
(previously only current directorships)
Legal proceedings
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New rules require disclosure of involvement by
director or director nominee in material legal
proceedings in prior 10 years (previously prior 5
years), with an expanded list of proceedings
Diversity
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New rules require disclosure of whether & how a
nominating committee considers diversity in
identifying nominees
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If nominating committee has a policy, disclosure
required as to how the policy is implemented and
how the board assesses the effectiveness of the
policy
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5. Board Leadership Structure
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Location
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General proxy statement disclosure (S-K Item 407)
Consider including in general Corporate Governance
section of proxy statement
Content
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Leadership Structure
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New rule requires disclosure of leadership structure of
the company’s board
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Does the same person serve as PEO and Chair?
If so, is there a lead independent director, and what is his or
her role?
Why is the leadership structure appropriate given the
company’s specific characteristics or circumstances?
Risk Oversight Role
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New rule requires disclosure of board’s role in
company’s risk oversight
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6. Compensation Consultants
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Location
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General proxy statement disclosure (S-K Item 407)
Content
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Fee disclosure
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New rule requires additional disclosure of fees
paid to consultants when they play any role in
determining or recommending the amount or form
of executive and director compensation if they
also provide other services to the company and
the fees for those other consulting services
exceed $120,000 during the company’s fiscal
year
Other services
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New rules also require disclosure regarding
– Whether the decision to engage the
compensation consultant for non-executive
compensation consulting services was made
or recommended by management
– Whether the board has approved the nonexecutive compensation consulting services
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6. Compensation Consultants (cont.)
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Exception to disclosure requirement
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Fee and related disclosure is not required about
consultants that work with management if the board
has its own consultant
Services involving only broad-based nondiscriminatory plans or the provision of information,
such as surveys, that are not customized for the
company or that are customized on parameters that
are not developed by the consultant are not treated
as executive compensation consulting services
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7. Report of Voting Results on Form 8-K
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Location
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Form 8-K, new Item 5.07
Content
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Voting results from shareholder meeting (AGM or
otherwise) to be disclosed on Form 8-K within 4
business days of the meeting
Previously, results were not required to be reported
until the filing of the next Form 10-Q or Form 10-K
If final results are not available within 4 business
days, a company must file the preliminary voting
results and then file an amended Form 8-K within 4
business days after the final voting results are known
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8. Other Items to Note for 2010 Proxy Season
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SEC may no longer give “futures” comments
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November 2009 speech by Shelley Parratt, Deputy
Director, Division of Corporate Finance
CD&A areas of focus:
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Analysis – the “how” and the “why”
Performance Targets
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Disclosure of historical financial targets
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Where omitted, provide meaningful specificity of
how difficult or likely it would be for the company
or executive to achieve the undisclosed target
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Example: Discuss the correlation between
historical and future achievement of the relevant
performance metric
Benchmarking and Peer Groups
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Name the peer companies and how selected
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Disclose where actual awards fell relative to the
benchmark
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8. Other Items to Note for 2010 Proxy Season
(cont.)
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No more broker discretionary voting in uncontested
elections
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NYSE (technical) corporate governance changes
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SEC proposed rules re eProxy (technical) changes
and shareholder access are still pending
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“Say on pay” is coming
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2010 proxy may be the last year before a mandatory
advisory vote on executive compensation (“say on
pay”)
Companies should view their compensation
disclosure accordingly
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CHOATE HALL & STEWART LLP
Choate, Hall & Stewart LLP
Two International Place
Boston, MA 02110
James W. Hackett
(617) 248-2133; [email protected]
Arthur S. Meyers
(617) 248-4808; [email protected]
John R. Pitfield
(617) 248-5093; [email protected]
CHOATE HALL & STEWART LLP
4603235
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