A top Securities and Exchange Commission official has shed a bit more light about what the SEC plans to study in its review of this season’s proxy statement disclosures, which should be released this fall.
In a recent speech at Northwestern University, Division of Corporation Finance Director John White reminded companies that the SEC is reviewing a “critical mass” of this year’s disclosures, which are the first filed under the SEC’s expanded rules for disclosure of executive compensation.
While giving feedback on the disclosures is a “key objective,” White said his staff will also consider whether any changes to the rules might be warranted. Among the questions the staff is studying are whether to revise the way the rules treat negative numbers and whether the rules for disclosure of performance targets should be refined.
“We are certainly studying these and other questions like them,” White said. “If there are common questions that are coming up that the staff can answer, we will also try to do that.”
Observers expect the forthcoming report to follow the same form as an SEC report issued in 1994, following the last major changes to the disclosure rules.
Borges
“I expect that whatever they come out with this fall will follow that general structure,” says Mark Borges, a principal at Mercer Human Resources Consulting. He characterized the review as a “report card” with comments to provide clarification in areas where the SEC felt people “didn’t understand or interpret correctly,” as well as comments on compensation committee reports, including examples of good and bad disclosures excerpted from actual filings.
“I think they’ll spend a fair amount of time commenting on the Compensation Discussion & Analysis,” Borges says. “That’s the area where the rules were probably the least specific and where companies had the most discretion to interpret the rules.”
Besides general comments on the quality of the disclosures, Borges expects the SEC to give specific examples of disclosures to illustrate points it wants companies to be mindful of next year. The SEC is likely to “give a lot of attention” to the disclosure of performance targets—or the lack thereof, Borges says. The Commission will probably give examples of disclosures by companies that claimed a basis for withholding the information, he says, and give SEC views of whether the explanations given for that claim were sufficient.
Benderly
The grounds for withholding performance targets—which is permissible, if the company can demonstrate that disclosing such data would put it at a competitive disadvantage—is the “number one issue” that Danielle Benderly, of the law firm Perkins Coie, hopes the SEC will address.
“I think a lot of companies erred on the conservative side this year and did not disclose their actual performance goals,” Benderly says. “I know we will all be looking for the SEC’s reaction to this year's disclosures for a signal on how to proceed for next year.”
Benderly believes the SEC will not call out specific companies as examples of bad disclosure, but will “synthesize its comments on companies’ filings into specific areas where it sees patterns and wants improvement.”
Benderly also hopes the SEC’s report will contain guidance on specific topics. One example: whether the value of a forfeited equity award should be included in the amounts disclosed only if the full expense associated with that award had already been disclosed in the summary compensation table. Benderly believes that is what White meant with his reference to “negative numbers” in the disclosure tables.
Borges also expects some discussion of the “plain English” disclosure requirement, with some examples of disclosure that met the spirit of that mandate. SEC Chairman Christopher Cox has begun a small crusade to prod companies into filing proxy statements with simpler language.
Separate from the report, Borges expects to see “suggested revisions, refinements, or changes” to the rules. “The staff has indicated in public statements that they wouldn’t be surprised if the Commission made some tweaks to help rules work better,” he says. “The real question is whether they'll conclude after their review that more significant changes are needed to get the disclosures back on track.”
One issue Borges expects to come up for debate this summer is whether the SEC should reverse its last-minute change in December to the way equity awards are reported. The original proposal called for equity awards to be fully expensed the year they are awarded, but the Commission’s final rule allowed the awards to be expensed year by year, across the length of the grant.
“We're starting to hear investors say it's too much information and it’s too hard to digest,” Borges says. “That change made it even more difficult, since people can’t take some of the numbers at face value.” Reverting back to the original rule would make the tables easier to prepare and to understand, he says.
Virginia Moves To Bolster Corporation Laws
The state of Virginia is climbing aboard the governance reform bandwagon, with amendments to its corporation law that allow for majority election of corporate directors.
The amendments, scheduled to take effect July 1, will only give companies the choice—not the mandate—to require that directors win a majority of votes cast in election votes. Previously, directors were elected by winning a plurality of votes cast. Majority election has swept Corporate America in the last two years, however, and now a majority of large U.S. companies require some sort of majority-vote threshold in uncontested elections.
Virginia’s changes allow companies to adopt majority voting by changing corporate bylaws, according to a legal bulletin from law firm McGuireWoods. Companies will not need to amend their articles of incorporation, which would require shareholder approval, although they can do so if they choose. Once included in the articles, further changes can only be made with shareholder approval.
“The ability to introduce majority voting through changes in the bylaws, which generally may be approved by directors only, gives new flexibility to Virginia corporations that wish to adopt these features,” the McGuireWoods bulletin notes.
Because Virginia continues to have a “holdover rule” for directors who fail to win majority support, to be fully operational, majority vote provisions need to be coupled with provisions requiring incumbent directors to deliver letters of resignation if they don’t receive the vote of the majority for their re-election to the board. Under additional amendments to Virginia law, directors may make their written resignations effective upon the occurrence of one or more events. In addition, a resignation predicated on failing to receive a specified vote for election as a director may provide that the resignation is irrevocable.
The provisions will allow companies to request from a newly elected director an irrevocable written resignation that may become effective if the director doesn’t receive a majority vote in future elections. Additional amendments were made in areas including abstentions and broker non-votes and board vacancies, among others.
Virginia is the second state to beef up its corporation law recently. Last month, North Dakota enacted some of the toughest corporate governance standards in the nation, requiring majority election of directors, among other items. But the state only has two publicly traded companies registered there, and both were grandfathered out of the changes.
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