Francis H. Byrd, Managing Director and Corporate Governance Advisory Practice Co-Leader
Walking the Tightrope – New Proxy Disclosures on Director Qualifications, Board Risk Oversight and Board Diversity – and new Climate Change Disclosures for the 10K
I had the opportunity, last Friday, to moderate a webinar for the Society of Corporate Secretaries & Governance Professionals (SCS&GP) discussing the strategies and tactics companies can undertake in response to the Securities and Exchange Commission’s new proxy disclosure rules on director qualifications and selection, and board diversity.
The webinar, sponsored by The Altman Group, had two panelists familiar with the new SEC disclosure rules - Maryann A. Waryjas of Katten Muchin Rosenman LLP, and Lori Zyskowski, Corporate and Securities Counsel at General Electric. The panel also included attorney Jane E. Montgomery of Schiff Hardin, an expert in environmental law, who discussed the SEC’s new rules on climate change disclosure for the 10K. Co-hosting from the SCS&GP was Darla C. Stuckey, SVP - Corporate Policy & Advocacy.
What ensued was a lively discussion about the new disclosures for the 2010 proxy season. Here were some of the key takeaways listed by disclosure challenge:
On Director Qualifications
- The use of a short introductory paragraph describing the recruitment goals and director selection criteria of the nominating/governance committee
- Development of short descriptions of individual director qualities and attributes
- The use of a ‘lite’ version of the board/director skills matrix as a jumping off point in describing the skills sets the board believes it needs to fulfill its responsibility to oversee management’s achievement of strategic goals
- The potential use of a more detailed director biography, similar to those utilized by companies when battling a short slate, might also be considered – see our discussion of the Point Blank Solutions proxy statement in our June issue of the Governance & Proxy Review
On Board Diversity
- Companies should bear in mind that any mention of diversity in corporate governance guidelines or nominating/governance committee charters obligates firms to discuss the role of diversity in the director selection and nominating process
- The notion of diversity on the board should include professional experience (policy, governmental, business or academic) and diversity of viewpoint as well as race, gender and ethnicity
Our speakers noted a certain level of overlap between the type and quality of information required for both the director qualifications and board diversity disclosure.
On Board Risk Oversight
- Provide an overview of how risk issues are elevated to the board level, the committee or committees involved, and who in management has the responsibility for reporting risk to the relevant committee or full board
- Be prepared to discuss Board leadership structure, if it has relevance to the review and discussion of risk at the board level
- Remember, the focus is on the board risk oversight process – not an analysis of the company’s material risks or how those risks are mitigated. A potential jumping off point might be the corporate governance assessments conducted by Moody’s and Standard & Poor’s as they describe detailed discussions of the board risk oversight process
During the joint webinar, speakers mentioned two companies, Fortune Brands (preliminary proxy) and Analog Devices (DEF 14 filing), whose proxies could serve as a template for incorporating the new disclosure requirements in 2010 proxies.
Also discussed was a point raised by the Governance & Proxy Review in previous issues (see issue #10, July 22nd), namely the viability of utilizing Canadian management proxy disclosure as a suggested template for disclosure of the director selection, director nominee recruitment process and director qualifications. MaryAnn A. Waryjas, while not familiar with whether Canadian securities rules match the SEC’s new requirements, did say that helpful information could be gleaned from the management circulars of Canadian filers, but that such a step should be fully explored for compatibility with new SEC disclosure rules.
Climate Change and Environmental Reporting
Jane E. Montgomery, Lori Zyskowski, and MaryAnn A. Waryjas engaged in a full discussion of the new SEC 10K disclosure requirements concerning environmental and climate change issues. The big takeaways for companies were: (1) that disclosure will force many firms to determine and analyze the potential impact of climate changes; and (2) discussion of the potential effect of proposed federal legislation, existing state law and international agreements, and treaties on business operations, risk mitigation and strategy.
While not having an immediate effect on the 2010 proxy season, speakers acknowledged that climate and environmental information will be closely monitored by environmental groups such as the CERES Coalition, whose members may develop future shareholder proposals around these concerns (see G&PR issues #15, August 28th and #16, September 4th for a full discussion of CERES).
The Elephant in the Room: Disclosure and Discussion of the Compensation Risk & Analysis in the Proxy
Before adjourning, the panelists commented briefly on questions involving the new SEC requirement for a discussion of risk in executive compensation arrangements. All our speakers noted the difficult tightrope that companies face in deciding how and whether to disclose the potential of material risk within companies executive compensation plans. We will look to provide a future webinar on this important topic.
Thank You
We would like to take this opportunity to thank the Society for asking us to sponsor and host this webinar, and also our panelists and the audience for their participation and patience with us as we work to master the art of the webinar. We look forward, as we noted above, to providing future webinars on various topics related to corporate governance, proxy disclosure, executive compensation and shareholder engagement.
Webinar Presentation Materials
For your convenience we have posted the relevant information discussed during the webinar, including the Fortune Brands and Analog Devices preliminary proxy statements, and the legal alerts from Maryann A. Waryjas of Katten Muchin Rosenman LLP and attorney Jane E. Montgomery of Schiff Hardin. To listen to a rebroadcast of the joint SCS&GP and The Altman Group webinar please visit this link on our website, or visit the Society of Corporate Secretaries and Governance Professionals website.
Breaking News on Proxy Mechanics Reform
The Council of Institutional Investors has released a whitepaper discussing proposed reforms on proxy plumbing.
The white paper, “The OBO/NOBO Distinction in Beneficial Ownership: Implications for Shareowner Communications and Voting” was prepared by Alan Beller and Janet Fisher, both partners at Cleary Gottlieb Steen & Hamilton, with the assistance of Rebecca Tabb, also at Cleary Gottlieb. Alan Beller is a former director of the SEC’s Division of Corporation Finance. The paper discusses the origins and evolution of the OBO/NOBO system, analyzes various proposals for changing it that have been floated recently and offers recommendations for reform that the authors believe to be in the best interest of investors. It offers a thoughtful, thorough review and recommends pragmatic, incremental change. The Council has no policies on the OBO/NOBO regime. The white paper is a starting point for Council discussion about key “proxy plumbing” issues that will be highlighted in the SEC’s upcoming concept release on the mechanics of proxy voting and communications.
