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New Proxy Rules for 2010: What You Need to Know to be Ready
Presented by:Mark R. Busch Douglas J. EllisCharlotte Pittsburgh
February 11, 2010
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Presenters
Douglas J. Ellis, PartnerPittsburgh Office [email protected]
Mark R. Busch, PartnerCharlotte Office [email protected]
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Agenda
Overview of New Rules Related to Compensation Disclosure
K&L Gates - Executive Compensation Rules Guidebook
Overview of New Rules Related to Director Qualifications and Corporate Governance
Current SEC Initiatives
Overview of What’s New for 2010
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Effective Date for Compliance with New Rules
New rules are formally effective February 28, 2010
Generally, if a company’s fiscal year ends on or after 12/20/09, the company’s 10-K and proxy statement must comply with the new rules if they are filed on or after 2/28/10
Preliminary proxy statements filed before 2/28/10 also must comply with the new rules if the company expects to file the definitive proxy on or after 2/28/10
Reporting of Equity Awards
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Reporting of Equity Awards in Tables
Report aggregate grant date fair value of all stock option and other equity awards in the SCT and the DCT
Focus is now on reporting only the value of awards granted in the fiscal year
For performance awards, the value reported is based on the probable outcome of the performance condition and footnote disclosure is required to report the maximum performance level
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Action Items
Grant date fair value is computed in accordance with FAS 123R (which has been redesignated and is referred to as FASB ASC Topic 718)
Must recalculate stock and option award columns of SCT using new approach for prior two years
Using the full grant date value of stock awards as compensation may significantly impact the determination of named executive officers from year-to-year
Compensation ConsultantDisclosures
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Reporting Consulting Service Fees Revised rules require additional disclosure about potential
conflicts of interest in connection with consulting services provided by compensation consultants
Where (1) the Company receives executive compensation consulting services and other non-executive compensation services from the same consultant (or its affiliates) and (2) the fees for the non-executive compensation services exceed $120,000, the following must be disclosed: The aggregate compensation-related fees and the aggregate non-
executive compensation-related fees received by the consultant (or its affiliates);
Whether the decision to engage the consultant (or its affiliates) to perform the non-executive compensation-related services was made, or recommended, by management; and
Whether the Board or Compensation Committee approved the non-executive compensation-related services performed by the consultant (or its affiliates)
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Action Items
Determine relationships between compensation consultants and other outside service providers, such as business consulting, actuarial
Generally no disclosure is required if both the Board (or the Compensation Committee) and management retain separate, unaffiliated compensation consultants
Evaluate whether consultants should be retained
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What Does Not Need to be Disclosed
There is an exception to the disclosure requirement (including the fee disclosures described above) if the only compensation-related services are (i) providing non-customized compensation surveys or data, or (ii) services relating to broad-based employee plans
No disclosure is required as to the nature or extent of the non-executive compensation-related consulting services, but that can be disclosed voluntarily
Disclosures Regarding Risk andCompensation Policies
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Disclosure Relating to Compensation Policies and Risk
Provide a narrative discussion of compensation policies and practices “as they relate to risk management practices and risk-taking incentives”
Disclosure is only required where it is determined that risks arising from the compensation practices are reasonably likely to have a material adverse effect on the company (similar threshold in MD&A)
Consider compensation programs for all employees, not just executives
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Possible Risk Disclosure Triggers
Identify business units that may: carry a significant portion of the Company’s risk profile be significantly more profitable than other units within the
Company or have compensation expense that is a significant percentage of the unit’s revenues
Evaluate any policy or practice that varies significantly from the overall risk and reward structure of the Company (e.g., bonus payment triggers not directly aligned with the Company’s income and risk related to the product, service or performance underlying the bonus)
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Additional “Red Flags” Regarding Risk Very steep leverage curve that can encourage reckless behavior
to earn substantial incremental reward to salvage a bad year or earn even more in a good year
No caps or deferrals with recoupment, encouraging reach beyond acceptable risk
100% formulaic, no discretion to assess behaviors or quality of results
Primarily revenue-driven with no management or board control to ensure sustainable profitability
Measuring performance using estimates that are subject to change without a corresponding change in the incentive structure
100% stock options No ownership or retention requirements
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Examples of Policies or Processes That May Mitigate Risk Use of clawbacks
Required holding periods
Policies and practices regarding adjustments to compensation practices in light of changes in the Company’s risk profile
Making compensation practices part of the Company’s overall risk management
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Action Items with Disclosure
Who makes the determination of whether disclosure is required…Compensation Committee, Board, a specially-tasked “risk assessment” committee?
If it is determined that no adverse risk exists, should you state that in the proxy?
Company-wide review of compensation practices may require substantial time and input from several sources
No one-size-fits-all approach
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Executive Compensation Rules Guidebook
Guidebook is at: http://www.klgates.com/newsstand/Detail.aspx?publication=5276
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Executive Compensation Rules Guidebook
The guidebook is divided into 21 sections broken down by topic, each of which: contains the full text of the rules applicable to the
topic sets forth important excerpts from the adopting
releases provides “practice pointers” to keep in mind relating
to the topic includes references to important source materials,
many of which are attached as appendices
Director Qualifications, Director Diversity Policies, Board Leadership Structure &Role in Risk Oversight
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Disclosing Director QualificationsThe new rules require the following new disclosures: A statement for each director and nominee regarding
“the particular experience, qualifications, attributes or skills” that led the Board to conclude that the person should serve as a director
A list of all public company directorships the director or nominee has held during the preceding five years
Expanded list of legal proceedings involving the director or nominee that occurred within the last ten years (rather than the current five years)
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Disclosing Director QualificationsAction items: Update director/officer questionnaires to pick up
additional directorships and legal proceedings.
Board/nominating committee needs to approve descriptions of “the particular experience, qualifications, attributes or skills” that led the Board to conclude that each nominee/director should serve as a director.
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Disclosing Director Diversity Policies
The new rules require disclosure of whether, and if so, how the nominating committee considers diversity in identifying director nominees.
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Disclosing Director Diversity Policies
Each company is free to define diversity in its own way and may include, for example, geographic diversity, educational background or individual qualities it deems important.
If the Company has a nominee diversity policy, disclosure is required regarding how the policy is implemented and how the committee assesses the policy’s effectiveness.
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Disclosing Director Diversity Policies
Action items: Create diversity policy?
Review nominating committee charter/nominations policy for language regarding diversity considerations
Add language regarding diversity to nominating committee charter/nominations policy
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Disclosing Board Leadership Structure
The new rules require disclosure of the Company’s leadership structure, focusing on why the Company believes that its structure is the best or most appropriate.
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Disclosing Board Leadership StructureSpecific disclosure is required regarding: Whether the Company has combined or separated
the CEO and Chairman functions
If Chairman and CEO function is combined, whether the Company has a lead independent director and the specific role played by that individual
Why the company has determined that its leadership structure is appropriate given its specific characteristics and circumstances
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Disclosing Board Leadership Structure
Action Items: If have combined Chairman/CEO function,
nominating/governance committee to review why is appropriate.
Consider creation of lead independent director position.
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Board’s Role in Risk Oversight
The new rules require disclosure of the extent of the board’s role in the risk oversight, such as: how the board administers its oversight function, and
the effect that this has on the board’s leadership structure.
Examples of risks include credit risk, liquidity risk and operational risk.
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Board’s Role in Risk Oversight
Action items: Review committee charters for risk items
Create Risk Oversight Committee?
Engage risk consultant to perform assessment?
Add risk review as regular board agenda item?
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New Form 8-K Reporting Requirement
Currently, shareholder meeting voting results are reported in 10-Q for the quarter in which the shareholder meeting occurred (or the 10-K if the meeting occurred during the fourth quarter).
The new rule requires shareholder voting results to be disclosedin a Form 8-K within four business days after the date of the meeting at which the vote was held.
This disclosure applies even in most cases where the voting results may not be known within the four-day reporting period, in which case the preliminary voting results are reported initiallyand then final results are reported in an amended 8-K.
Current SEC Initiatives
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Current SEC Initiatives
Facilitating Shareholder Director Nominations Proposed June and Dec. 2009
Changes to e-proxy rules Proposed Nov. 2009
Shareholder Approval of Executive Compensation Approved for TARP Recipients July 2009 Is everyone else next?
