December 17: Operational Risk – SEC Approves Enhanced Disclosure about Risk, Compensation and Corporate Governance
Courtesy of RiskCenter.com http://www.riskcenter.com/story.php?id=19377
Location: Washington, DC
Author: RiskCenter Staff
Date: Thursday, December 17, 2009
The Securities and Exchange Commission today approved rules to enhance the information provided to shareholders so they are better able to evaluate the leadership of public companies.
Beginning in the upcoming annual reporting and proxy season, the new rules will improve corporate disclosure regarding risk, compensation and corporate governance matters when voting decisions are made.
�Good corporate governance is a system in which those who manage a company � that is, officers and directors � are effectively held accountable for their decisions and performance. But accountability is impossible without transparency,� said SEC Chairman Mary L. Schapiro. �By adopting these rules, we will improve the disclosure around risk, compensation, and corporate governance, thereby increasing accountability and directly benefiting investors.�
In particular, the new rules require disclosures in proxy and information statements about:
* The relationship of a company�s compensation policies and practices to risk management.
* The background and qualifications of directors and nominees.
* Legal actions involving a company�s executive officers, directors and nominees.
* The consideration of diversity in the process by which candidates for director are considered for nomination.
* Board leadership structure and the board�s role in risk oversight.
* Stock and option awards to company executives and directors.
* Potential conflicts of interests of compensation consultants.
The new rules, which will be effective Feb. 28, 2010, also require quicker reporting of shareholder voting results.
Specifically, the Commission�s approved rules will:
Require Disclosure of a Company�s Compensation Policies and Practices as They Relate to the Company�s Risk Management:
The SEC approved a rule that would help investors determine whether a company has incentivized excessive or inappropriate risk-taking by employees. Among other things, it would require a narrative disclosure about the company�s compensation policies and practices for all employees, not just executive officers, if the compensation policies and practices create risks that are reasonably likely to have a material adverse effect on the company. Smaller reporting companies will not be required to provide the new disclosure
Enhance Information About Directors and Nominees:
The SEC approved new rules to improve information about directors and nominees for director. The new requirements include for each director and director nominee, disclosure of:
* The particular experience, qualifications, attributes or skills that led the company�s board to conclude that the person should serve as a director of the company.
* Any directorships at public companies and registered investment companies that each director and director nominee held at any time during the past five years.
* Legal proceedings, such as SEC securities fraud enforcement actions against the director or nominee, going back 10 years, instead of the current 5 years, as well as an expanded list of legal proceedings covered by the rule.
Disclose How Diversity Is Considered in the Director Nomination Process:
The SEC approved a rule that would require disclosure of whether, and if so how, a nominating committee considers diversity in identifying nominees for director.
If the nominating committee or the board has a policy with regard to the consideration of diversity in identifying director nominees, the final rules require disclosure of how this policy is implemented and how the nominating committee or the board assesses the effectiveness of its policy.
Provide Information About Board Leadership Structure and the Board�s Role in Risk Oversight:
The SEC approved rules relating to board leadership structure and the board�s role in risk oversight. The rules require disclosure about:
* A company�s board leadership structure, including whether the company has combined or separated the chief executive officer and chairman position, and why the company believes its structure is the most appropriate for the company at the time of the filing.
* In certain circumstances, whether and why a company has a lead independent director and the specific role of such director.
* The extent of the board�s role in the risk oversight of the company.
Require Quicker Reporting of Voting Results:
The SEC approved amendments to Form 8-K that would require companies to disclose the results of a shareholder vote within four business days after the end of the meeting at which the vote was held. This replaces the requirement to disclose voting results in Forms 10-K and 10-Q, which often are filed months after the relevant meeting.
Revise the Summary Compensation Table:
The SEC approved revisions to the reporting of stock and option awards in the Summary Compensation Table and the Director Compensation Table to better reflect the compensation committees� decisions with regard to these awards.
* The amended rule requires companies to report the value of options when they are awarded to executives (the aggregate grant date fair value), instead of the current requirement to report the annual accounting charge.
* A special instruction addresses performance based awards to address concerns that the new rule might discourage use of these awards.
Enhance Disclosure About Compensation Consultants:
The SEC approved rules requiring disclosure about the fees paid to compensation consultants and their affiliates in certain circumstances. This is intended to provide investors with information to help them better assess the potential conflicts of interest a compensation consultant may have in recommending executive compensation. The final rules are consistent with the rule proposal, but include exceptions for circumstances that should not raise the potential conflicts of interest.