A New Year with New Challenges
Francis H. Byrd, Managing Director and Corporate Governance Practice Co-Leader
On December 16, 2009, the SEC adopted amendments to its executive compensation and corporate governance disclosure regime for public companies requiring them to enhance disclosures in their proxy statements and other SEC filings.
The enhanced disclosure focuses on six specific issues:
- Director (and director nominee) qualifications, background and diversity
- Board leadership structure
- Board risk oversight
- Use of, and potential conflicts of interest with, compensation consultants
- Material risk in compensation policies and practices
- Tabular disclosure of the value of equity and option awards to NEOs and directors
In this week’s issue, we are going to discuss the enhanced disclosure of director nominee qualifications and background, what the SEC hopes to achieve under this new regime, and the type of information activist institutions will continue to seek about directors.
In her December 16th open meeting comments, SEC Chair Mary Schapiro outlined the Commission’s goals for enhanced proxy statement disclosure – that “investors will better understand the background and qualifications of directors and board nominees”. Institutional investors, members of the Council of Institutional Investors, and the International Corporate Governance Network, individually and collectively, have lobbied for greater disclosure on the background and experience of director nominees, seeking to understand the rationale for director selection beyond the boilerplate biographical information contained in the proxy statement.
Companies will now have to provide information on directors’ experience, qualifications, and professional skills relating to board service. Companies should bear in mind that the original proposal sought to relate a director nominee’s background to both committee assignments and the full board. Shareholders want to have a greater understanding of directors’ skills, outlook, and opinions on questions of corporate governance. For example, the Universities Superannuation Scheme (USS) and the UK pension scheme, in consultation with other activist institutions, has developed a questionnaire for the nominating committees and director nominees of companies with whom they engage. A quick review of the questionnaire indicated that USS seeks insight into director candidates and the process that selected them.
Now What? – What Should Companies Do?
As companies begin to prepare their proxies (or revise their proxy in light of the SEC’s proxy enhancements) they should address the following:
- Review their corporate governance and executive compensation structures
- Identify and understand any hot button issue – compensation, director independence, anti-takeover provisions, over-boarding – that could be flagged by RiskMetrics, other proxy advisory firms, or activist institutional investors
- Determine which directors, if any, could be vulnerable to withhold recommendations from proxy advisory services or who could be the subject of a Vote-No campaign by activist shareholders
- Review and update, as needed, director and officer questionnaires to ensure they capture the type and quality of information now required for inclusion in the proxy statement
The other challenge for companies will be in determining how best to communicate this information to investors. The goal should be to provide their shareholders with a window on the processes utilized by the nominating committee and the board in assessing its leadership needs and on selecting prospective directors to meet those requirements.
In issues 9 & 10 of the G&PR (July 17th and 24th) last year, we briefly discussed examples of enhanced disclosure addressing director nominee selection criteria and the process undertaken by the nominating committee. We highlighted three solid examples: 1) The Point Blank Solutions, Inc., 2008 proxy statement - used by the company in their 2008 contest for control with Steel Partners; 2) the 2008 management circular for Cameco, a Canadian mining firm; and 3) a 2008 management circular for Nexen, a Canadian international oil company. Canadian issuers operate under disclosure rules very similar to those adopted by the SEC this past December.
All three disclose nominee selection processes and director biographical information in a straightforward manner. We have posted all three on our website: the management proxy circulars for the two Canadian companies and the PointBlank Solutions proxy statement. We believe you will find these examples useful as you consider your options and draft your proxy materials for the 2010 season.
