SEC Approves Rules on Proxy Enhancements

Beginning in the upcoming annual reporting and proxy season, the new rules will improve corporate disclosure regarding risk, compensation and corporate governance matters when voting decisions are made, the SEC said.

Included in the proxy enhancements is a rule that would help investors determine whether a company has incentivized excessive or inappropriate risk-taking by employees. Among other things, it would require a narrative disclosure about the company’s compensation policies and practices for all employees, not just executive officers, if the compensation policies and practices create risks that are reasonably likely to have a material adverse effect on the company. Smaller reporting companies will not be required to provide the new disclosure.

The SEC approved revisions to the reporting of stock and option awards in the Summary Compensation Table and the Director Compensation Table to better reflect the compensation committees’ decisions with regard to these awards. The amended rule requires companies to report the value of options when they are awarded to executives (the aggregate grant date fair value), instead of the current requirement to report the annual accounting charge. A special instruction addresses performance based awards to address concerns that the new rule might discourage use of these awards.

The SEC also approved rules requiring disclosure about the fees paid to compensation consultants and their affiliates in certain circumstances. The agency said this is intended to provide investors with information to help them better assess the potential conflicts of interest a compensation consultant may have in recommending executive compensation. The final rules are consistent with the rule proposal, but include exceptions for circumstances that should not raise the potential conflicts of interest.

Leadership Disclosures

The SEC's approved proxy disclosure enhancements include for each director and director nominee, disclosure of:

• the particular experience, qualifications, attributes or skills that led the company's board to conclude that the person should serve as a director of the company;
• any directorships at public companies and registered investment companies that each director and director nominee held at any time during the past five years; and
• legal proceedings, such as SEC securities fraud enforcement actions against the director or nominee, going back 10 years, instead of the current five years, as well as an expanded list of legal proceedings covered by the rule.

If the nominating committee or the board has a policy with regard to the consideration of diversity in identifying director nominees, the final rules require disclosure of how this policy is implemented and how the nominating committee or the board assesses the effectiveness of its policy.

In addition, the enhancements include rules relating to board leadership structure and the board's role in risk oversight. The rules require disclosure about:

•  A company's board leadership structure, including whether the company has combined or separated the chief executive officer and chairman position, and why the company believes its structure is the most appropriate for the company at the time of the filing;
• In certain circumstances, whether and why a company has a lead independent director and the specific role of such director; and;
• The extent of the board's role in the risk oversight of the company.

 The SEC's Proxy Disclosure Enhancements are here.