Corporate governance: SEC, shareholder activism driving enhanced director disclosure

February 17, 2012

By Alex Lee

NEW YORK, Feb. 17 (Business Law Currents) – With a slew of Dodd-Frank and SEC driven regulations headlining the 2012 proxy season, enhanced director disclosure will be a prominent issue as investors demand heightened corporate accountability and broader levels of transparency. Rules put in place a couple years ago on compensation policies, risk incentivizing, director/nominee disclosure, board structure and oversight have now had the time to incubate sufficiently for companies to respond in a serious manner.

The Main Street versus Wall Street debate and the ensuing Occupy Wall Street movements have done much to expand public angst from mere disgruntlement with corporate America to even more emphasis on corporate governance in general. The public battle is now being waged increasingly on the battlefield of executive compensation, and as a consequence, on director disclosure.

By way of background, on December 16, 2009, the SEC put in place rules designed to enhance disclosures related to corporate governance. The rules became effective on February 28, 2010. Some particularly pertinent rules include compensation with respect to risk management, enhanced director disclosure and risk oversight and structure. These rules in tandem with fresh Dodd-Frank rules coming into effect for the 2012 proxy season will become critical issues for companies in the coming months.

It is now a requirement that companies must disclose compensation policies as they relate to all employees with respect to management and incentivizing risk taking. The caveat is that such disclosure is only required if the risks are reasonably likely to have a material adverse effect. Smaller companies are not required to observe this requirement. Questions will remain as to the efficacy of this requirement as there will not likely be many companies that determine disclosure is necessary under the current regime.

Incentive based compensation has always existed in a tenuous parlay with risk taking behavior. There is an increasing perception that certain individuals in a company are inherently positioned to expose companies to legitimate risk due to greed or short-termism, and that actions need to be taken to curb excesses before they erupt.

At the forefront of these excesses were the financial institutions such as Goldman Sachs, once described as a hedge fund with a vestigial investment bank attached. To their credit, the banks have taken pole position on the remuneration/risk issue and in the years going forward, it may very well be that other industries with less pronounced conflict issues may more actively address these concerns as well.

Many analysts cheered the new developments as the credit crisis highlighted compensation strategies of companies and related incentive programs that some saw as endemic to ludicrous risk taking behavior by employees. The rules now in place are designed to address the symbiotic relationship between remuneration and acceptable risk exposure.

The disclosures must come in the form of a narrative but are in fact “principles based,” so disclosures will vary from company to company. If nothing else, the regime at least puts the disclosure onus on companies for practices such as guaranteed bonuses, short term incentive plans and meaty severance packages.

Although corporate America faces many objections on the above issues, the logical solution appears to lie in tying remuneration with a long term value creation outlook. Companies may eschew short-termism by tying in compensation, particularly equity awards/options with time horizons lasting many years, with targets that tie performance to long term shareholder value growth. Nothing will change the bonus culture of directorships. However, tying in executives to equity kickers that blossom in retirement may help strike a necessary balance.

Boards of directors and enhanced disclosure related to them have also been a strong focal point of SEC requirements with increased information being required as to a board’s composition. Now, items that must be disclosed include experience and qualifications, and skills and abilities leading to nominations. Again, as with compensation and risk taking disclosures mentioned above, there appears to be more bark than bite in these requirements due to vagueness, as the SEC did not explicitly specify what disclosures need to be made. The only guidance is that if a skill was used to assess a candidate, then it should be disclosed.

Although many board nominations and elections are mere formalities, there is a need to provide investors with substantially better disclosure on why a nominated director is the right choice for a particular company. One element that has substance is the requirement that any directorships held at any period over the last five years, not only current directorships, must be disclosed.

The impact of these rules is that investors will be in a much better position to assess the relevant bearing of a nominee/director’s previous experience, put on display other nominee/director business commitments, and provide insight on what commercial and professional connections could potentially lead to conflicts of interest.

There is also a requirement to disclose the oversight structure of boards. Companies will have to explain the rationale of why the roles of CEO and board chairperson are separate or unified. In the cases where the roles are unified, it must be disclosed if there is an independent lead director and also the role of that capacity. It must also be clearly delineated what precisely a board’s role is in relation to the risk oversight of the company.

Board oversight disclosure is significant as the rules require companies to explain why their leadership structures are organized in the manner that they are. Although the SEC was not motivated in prompting company board changes with its regulations, it had in mind a company’s ability to justify its leadership appropriateness. These requirements are particularly timely, and relevant as a company’s awareness of the complex interplay between its management and board must be exhibited if risk exposure facing a company is to be adequately mitigated.

The continued onrush of Dodd-Frank and the SEC does not appear to be losing any momentum. With corporate governance issues ever more rapidly coming to the forefront of shareholder and larger public concern issues, it is apparent that the boards are no longer the sole stewards of corporate America.

For a few years now, shareholders and investors have made great inroads in being heard and their role is now significantly impacting how corporations are run. Shareholders are not only actively pursuing their interests through corporate governance issues but they are also increasingly looking to involve themselves at the operational level, once the sole remit of management and boards.

As the 2012 proxy season approaches, it is intrinsically important that companies vigorously engage shareholders in both substance and breadth. Such outreach will be critical to establishing the goodwill necessary for positive outcomes on issues such as director votes and proxy access determination. It behooves companies to clearly elucidate their corporate governance practices, philosophy and strategies for implementation in order to avoid the specter of dragged out proxy fights. It is further likely that shareholder demands in this respect, will grow at a more feverish pitch this year.


(This article was first published by Thomson Reuters’ Business Law Currents, a leading provider of legal analysis and news on governance, transactions and legal risk. Visit Business Law Currents online at )

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