The Securities and Exchange Commission has finally come forward with recommendations to help companies prepare their executive pay disclosures in next year’s proxy statements. The first tip: Scrap last year’s disclosures.
John White, director of the SEC’s division of corporation finance, warned in a speech last week that anyone planning to prepare next year’s proxy statements by marking up this year’s disclosures should “step back and start with a clean slate.” White’s remarks coincided with the release of a long-awaited report by the SEC staff, recapping its review of 350 public company filings for compliance with the SEC’s new rules for disclosure of executive pay.
Mueller
The staff report and White’s Oct. 9 speech underscore several areas where the division feels companies can improve their analysis. Foremost, says Ronald Mueller, a partner at the law firm of Gibson Dunn & Crutcher, is the message that Compensation Discussion and Analysis reports “are a work in progress, and many companies will need to refocus and refine their CD&As through a substantial rewrite. Simply adding a few sentences here and there will not work.”
The report had two main themes: First, companies should provide more focused disclosure of how and why they made specific executive compensation decisions. Second, the manner of presentation matters. White said the “analysis” portion of the CD&A is where many companies “came up short.”
For example, he said, when disclosing compensation philosophies and decision-making processes, “What was missing was a discussion of how and why those philosophies and processes resulted in the numbers the company presented in its tabular disclosure.”
That does not mean disclosures should be longer or more technical, the report stresses. Indeed, “shorter, crisper, and clearer would often be better,” it says.
Bell
Julie Bell of the law firm Hogan & Hartson, says the SEC’s bottom line is that companies must “get to the point in the CD&A. Don’t dance around issues.” She says companies that haven’t yet filed their proxies or that didn’t get individual comment letters—the SEC staff sent out several hundred—should “take a hard look” at the report and at White’s speech.
Other areas where the SEC said analysis was missing included discussion of how amounts awarded under each compensation element affected decisions companies made regarding amounts awarded under other compensation elements; disclosures with respect to benchmarks; and differences in compensation policies.
Emphasizing that disclosure is required “only where material,” White reminded companies that examples given in the rules “neither encompass the universe of possible required disclosures, nor are they mandatory.”
Of performance targets—the topic that received the most SEC comments—White said: “Far too often an analysis of how the targets were used in setting compensation was missing.”
Companies should also focus on being “clear, concise, and understandable” in their manner of presentation and should consider how to present information in ways that help people understand it, such as tables and charts.
White
“As we enter the second season, we will expect companies to have taken our guidance to heart,” White warned. “I anticipate that you will see that heightened expectation reflected in the type and focus of our comments and reactions next year.”
Edward Smith, a partner at Chadbourne & Parke, says most companies “have a lot of work to do” based on the staff comments.
Smith says clients that got comment letters are “spending a lot of time giving attention to those letters and the nature of their responses. They understand that they are, in effect, writing their compensation disclosure now for next year when they respond,” he says.
SEC Forms Office for XBRL Adoption
The SEC has established a new office to spearhead the adoption of XBRL, the interactive computer language for financial reporting that the Commission eventually wants to mandate.
As part of a broad effort it hopes will revolutionize financial reporting, the SEC has created the Office of Interactive Disclosure to lead the transformation to interactive financial reporting by public companies.
Announced last week, the move follows news that the SEC expects to propose a rule next spring making XBRL filings mandatory. It also comes after the XBRL US consortium announced a comprehensive new “taxonomy” of accounting terms so XBRL will be able to accommodate companies’ many different types of financial terms and data.
The SEC has tapped Standard & Poor’s veteran David Blaszkowsky, 45, as director of the interactive disclosure office. In that role, he will coordinate the agency-wide disclosure modernization program and will work with investor groups, analysts, journalists, financial statement preparers, and other stakeholders to advance the use of XBRL in financial reporting.
Blaszkowsky, who spent a total of 11 years at S&P parent McGraw-Hill, most recently led S&P's Corporate Markets and Investor Relations Services businesses as a senior director in equity research services.
Financial Reporting Committee Meets Nov. 2
The SEC’s Advisory Committee on Improvements to Financial Reporting will hold its second public meeting next month at the SEC’s main offices in Washington. The Nov. 2 meeting will be open to the public and Webcast on the SEC Web site.
Written statements for the meeting may be submitted to the SEC by Oct. 26. Already on the agenda: consideration of comment letters received by the committee, subcommittee reports, discussion of any recommendations proposed for adoption, and discussion of next steps and planning for the next meeting, according to a notice published by the SEC last week.
The committee was formed this summer to make recommendations to the SEC on ways to improve corporate financial reporting and to reduce complexity. The panel, which met for the first time in August, published a discussion paper for comment and formed subcommittees on substantive complexity, the standards-setting process, compliance and audit, and information delivery.
Pozen
In a recent interview, committee chairman Robert Pozen said the panel could issue some interim proposals as soon as January. The group’s final report is due next summer.
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