On February 28, the SEC expanded its rules regarding executive compensation and corporate governance. These changes could have profound implications for companies of all sizes. The amendments represent the SEC’s efforts to increase investor awareness of companies’ executive compensation practices and a desire to provide shareholders with a greater voice in their companies.
The amendments include the following provisions:
If a company’s compensation policies and practices are “reasonably likely to have a material adverse effect on the company,” the company must provide disclosure regarding these policies and practices in terms of their relation to risk-taking incentives and risk management.
Previously, the SEC required companies to use the annual financial accounting expense for equity awards in the Summary Compensation Table and Directors Compensation Table. Under the new amendment, the grant date value for the disclosure of the estimated dollar values of equity-based compensation awards, as determined under FASB ASC Topic 718 (formerly referred to as FAS 123(r)), will now be utilized instead.
For all directors, even nominees for directors, companies must annually disclose information related to the person’s experience, qualifications, skills or attributes that led the board to consider the individual worthy of serving as a director for the company. In addition, if a director is chosen specifically because of his or her service on a board or committee, this information must be disclosed as well. Each director or nominee must disclose directorships at public companies and registered investment companies they have held at any time during the past five years. Furthermore, the period for which disclosure of legal proceedings involving directors, director nominees, and executive officers is required has been increased from five to ten years.
Previous practice dictated that disclosures of results on proposals voted on by shareholders be filed on the next filed Form 10-Q or 10-K. The SEC now requires accelerated disclosure on Form 8-K of results on proposals voted on by shareholders within four business days of a shareholder meeting.
In light of these amendments, publicly held companies should examine their existing compensation or risk management processes and practices, committee charters, D&O questionnaires, and organizational structure to be able to prepare the required disclosures. As the new amendments significantly expand the disclosure requirements, most companies may need guidance to comply with these new rules and should consider consulting a corporate attorney familiar with SEC regulations.