1、Changing Landscapes: Evolving SEC Rules on Risk-Related Compensation and Governance Disclosure,Moderator Justin W. Chairman, Morgan LewisPanel James J. Bowes, Liberty Property Trust Alan Singer, Morgan Lewis Amy P. Kelly, Morgan Lewis,November 10, 2009,2,Agenda,July 2009 SEC Rule Proposal Overview o
2、f Executive Compensation Developments - RISK Changing Role of Compensation Committee Say on Pay Proxy Advisory Firm Considerations,3,July 2009 SEC Rule Proposal,4,Overview of Rule Proposal,Expansion of CD&A to address risk-related issues Board structure (CEO/CoB) and its relation to risk Board membe
3、r qualifications Compensation consultant conflicts Reporting of stock and option award values Acceleration of shareholder vote reporting,5,Status,“Risk Rules” still expected for 2010 proxy season No final rules yet - comment period ended mid-September Other proposals (shareholder nominations) delaye
4、d Legislative initiatives on governance unlikely to be effective for 2010 proxy season In its current form, proposed Investor Protection Act of 2009 would repeal Sarbanes-Oxley auditor attestation for issuers with market cap under $75mm “Were not interested in lots of information; were interested in
5、 meaningful information.” (Mary Schapiro, November 4, 2009),6,Overview of Executive Compensation Developments,7,Overview of Current Regulatory and Legislative Developments,Obama Administration principles Say on Pay legislation SEC proxy disclosure and corporate governance proposals,8,Obama Administr
6、ation Statement on Executive Compensation,June 10, 2009 statement by Timothy Geithner Compensation plans should properly measure and reward performance. Compensation should be structured to account for the time horizon of risks. Compensation practices should be aligned with sound risk management. Re
7、examine whether golden parachutes and supplemental retirement packages align the interests of executives and shareholders. Promote transparency and accountability in the process of setting compensation.,9,Proposed Legislation,H.R. 3269: Corporate and Financial Institution Compensation Fairness Act o
8、f 2009 Say on Pay Public companies will be required to obtain a non-binding shareholder vote on executive compensation at each annual meeting. A separate non-binding shareholder vote with respect to executive officer parachute payments will be required in connection with any merger or acquisition pr
9、oposal submitted to shareholder approval.,10,Proposed Legislation,Compensation Committee Standards Enhanced independence standards will be imposed on compensation committee members. Any compensation consultants or legal counsel retained by the compensation committee must be independent of management
10、. The company must provide the compensation committee with sufficient funding to retain independent compensation consultants, legal counsel, and other advisors.,11,SEC Executive Compensation Disclosure and Corporate Governance Proposals,SEC issued proposed guidance with respect to proxy disclosure a
11、nd corporate governance on July 10, 2009. Executive Compensation Compensation Discussion and Analysis must address the risks created by the companys compensation policies and practices for employees (including non-executive officers), if those risks may have a material adverse effect on the company.
12、 The key issue is whether any of the companys compensation programs encourage excessive or inappropriate risk-taking by executive officers or other employees that would jeopardize the economic viability of the company.,12,SEC Executive Compensation Disclosure Proposals,Grant-date fair value will rep
13、lace FAS 123(R) compensation expense in reporting equity awards in Summary Compensation Table and Director Compensation Table. The FAS 123(R) compensation expense recognized for financial reporting purposes for the fiscal year will no longer be reported.Additional disclosure will be required with re
14、spect to the fees and services of compensation consultants who perform additional services for the company.,13,SEC Corporate Governance Proposals,Corporate Governance Enhanced disclosure will be required with respect to the experience and qualifications of board members and nominees. There will be n
15、ew disclosure requirements for the companys leadership structure and the boards role in risk management.,14,Changing Role of Compensation Committee,15,SEC Proposed Proxy Disclosure Rules,Expanded disclosures for compensation committee New compensation risk analysis Expanded disclosures for leadershi
16、p structure Expanded disclosures for compensation consultants,16,New Disclosure: Risk Analysis,Require new CD&A section: Explain how companys overall compensation policies and practices create incentives that can affect companys risk,17,New Disclosure: Risk Analysis,To the extent material, the discl
17、osure would need to address: how the design of the companys compensation policies affects risk-taking by employees; the companys risk assessment or incentive considerations in structuring the policies and paying the compensation; the extent to which the policies address long-term risks (e.g., by imp
18、osing clawbacks or holding periods); the extent and nature of changes to the policies to address changes in the companys risk profile; and the extent to which the company monitors its compensation policies to determine whether its risk management objectives are being met.,18,New Disclosure: Risk Ana
19、lysis,Potential situations that may require disclosure are policies or practices: At a business unit of the company that carries a significant portion of companys risk profile or is structured significantly differently from other units within the company At a business unit that is significantly more
20、 profitable than others within the company or involves greater risk than others,19,New Disclosure: Leadership Structure,Proposed rules would require disclosure of: the companys leadership structure, including whether the positions of chairman and CEO are held by one or two individuals. If both posit
21、ions are held by a single individual, must disclose whether the company has a lead independent director and the specific role played by the lead director. why the company believes its leadership structure is appropriate given the companys specific characteristics or circumstances. the boards role in
22、 the companys risk management process and the effect it has on the companys leadership structure.,20,New Disclosure: Leadership Structure,Examples include: the relationship between the board and senior management in managing the material risks facing the company, whether the boards risk management f
23、unction is performed by the board as a whole or by a committee, and whether, and how, the board or committee monitors risk.,21,New Disclosure: Committee Qualifications,Require disclosure of specific qualifications and attributes of directors and nominees that qualify them to serve on board committee
24、s Must include more detailed disclosure of directorships held in last five years, not just current board memberships More information regarding skills, experience, attributes, and qualifications Disclosure of any legal proceedings from the last 10 years, compared to five years,22,New Disclosure: Com
25、pensation Consultants,Proposed amendment to Item 407 of Regulation S-K to require additional disclosure on compensation consultants. A description of the nature and extent of additional services provided to the company by the compensation consultant and any affiliates The aggregate fees paid for all
26、 additional services and for work related to executive and director compensation consulting,23,New Disclosure: Compensation Consultants,Additional disclosure: Whether the decision to engage the compensation consultant for any other services was recommended or made by management Whether the board of
27、directors or the compensation committee approved the other servicesDoes not apply in situations where the only role is recommending compensation in connection with broad-based plans like 401(k) and health plans,24,Pending Legislation and Impact on Compensation Committee,Legislation proposed by Treas
28、ury would amend the Securities Exchange Act of 1934 to add provisions applicable to compensation committees similar to the provisions applicable to audit committees added by Sarbanes-Oxley. Compensation committee members would be required to meet the same independence standards as applicable to the
29、audit committee. Could not accept any consulting, advisory, or other compensatory fee from the issuer, or be an “affiliated person” of the issuer or its subsidiaries.Any compensation consultant, legal counsel, or other adviser to the compensation committee must meet independence standards set by the
30、 SEC. SEC would be required to act within 270 days of enactment to direct the stock exchanges to implement these requirements as listing standards.,25,Pending Legislation and Impact on Compensation Committee,Pending legislation would require that compensation committees be given authority to retain
31、independent advisors, including compensation consultants and legal counsel.Compensation committee must be directly responsible for the appointment, compensation, and oversight of independent advisors.Company must provide adequate funding for independent advisors. For proxy statements filed for annua
32、l meetings occurring more than one year after enactment, company must disclose whether the compensation committee retained an independent compensation consultant and, if not, an explanation as to why.SEC would be required to study the use of independent compensation consultants and report to Congres
33、s within two years.,26,Items to Consider,Compensation committee should review all compensation programs for risk arising from the programsEstablish appropriate risk review processConsider reviewing board members to ensure the right mix of qualifications on board committeesHave the compensation commi
34、ttee retain a compensation consultant directly instead of through managementReview compensation consultants role and fee arrangements,27,Say on Pay Facing the Inevitable?,28,Say on Pay, What is it?,An annual advisory vote on executive compensation policies and procedures and/or actual compensation p
35、aid to executives.As an advisory vote, it is non-binding. Nevertheless, the theory behind the vote is that it can influence the decision-making process of compensation committees.,29,The Say on Pay Revolution,2003 The Directors Remuneration Report Regulations 2002 require all UK companies that are l
36、isted in the UK or any other EEA country, or on the New York Stock Exchange or NASDAQ, to: include a detailed report on directors remuneration in the annual report; and submit for shareholder vote at each annual general meeting a resolution to approve the report. 2006-2009 AFSCME (in 2006) and, subs
37、equently, a coalition of institutional and retail investors sponsor proposals seeking an advisory vote on executive compensation: In 2009, over 100 shareholder proposals seeking say on pay votes. Many received majority support. In the most recent proxy season, a number of companies that are not TARP
38、 recipients (approximately 15) conducted say on pay votes including Verizon, Intel and Motorola. The financial crisis has led to legislatively mandated say on pay for TARP recipients, as well as legislation approved by the House of Representatives that would mandate say on pay for most public compan
39、ies.,30,The Say on Pay Vote What are Shareholders Voting On?,Say on pay votes have focused either on policies and procedures used in formulating executive compensation or on the actual compensation paid.Policies and procedures approach: Aflac (2008) “Resolved, that the shareholders approve the overa
40、ll executive pay-for-performance compensation policies and procedures employed by the Company, as described in the Compensation Discussion and Analysis and the tabular disclosure regarding named executive officer compensation (together with the accompanying narrative disclosure) in this Proxy Statem
41、ent.” Intel Sought approval of the compensation committees philosophy, policies and procedures as described in the CD&A.,31,The Say on Pay Vote What Are Shareholders Voting On?,Actual compensation approach:Alaska Air Proposal that shareholders ratify the compensation of the named executive officers
42、set forth in the Summary Compensation Table and accompanying footnotes (but not including the CD&A). Tech Data Proposal that shareholders vote, on an advisory basis, for the compensation awarded to the named executive officers for FYE 1/31/09, as shown in the Summary Compensation Table. MBIA two pro
43、posals: Support compensation paid to the CEO for 2008 and the 2009 salary, as shown in a table appended to the resolution. Support for compensation paid to Senior Executive Officers as a whole (excluding the CEO) for 2008 and the 2009 salaries, as shown in a table appended to the resolution. Littlef
44、ield Corporation Shareholder vote on whether the CEOs total compensation is “within 20 percent of an acceptable amount.”,32,The Say on Pay Vote Consequences of the Vote?,“Because your vote is advisory, it will not be binding upon the Board. However, the Compensation Committee will take into account
45、the outcome of the vote when considering future executive compensation arrangements.” Aflac Virtually identical statement used by several other companies.Reference to discussions with shareholders: Blockbuster The Compensation Committee, in addition to considering the shareholder vote, intends to ta
46、ke into account discussions between stockholders and a committee to be established by the Board to address stockholders concerns (the committee would be formed if shareholders do not approve the say on pay proposal). Intel “Voting results provide little detail by themselves, and in the event there i
47、s a significant negative voting result, the company would consult directly with stockholders to better understand issues and concerns not previously presented.” Forest Laboratories “The Board and Management are committed to our stockholders and understand that it is useful and appropriate to obtain
48、the views of our stockholders when considering the design and initiation of executive compensation programs.”,33,The Say on Pay Vote Other Disclosure and Voting Matters,Limited or no supporting statements. Verizon and H&R Block - disclosures contained bullet point recitations of improvements to comp
49、ensation practices. MBIA - Describes Say on Pay Policy.Broker Non-Votes NYSE Rule 452 Say on pay proposals are company proposals supported by the companys board. Therefore, they generally are considered “routine.” Brokers can vote in their discretion if they do not receive instructions from sharehol
50、ders.,34,Say on Pay for TARP Institutions Legislative Action,American Recovery and Reinvestment Act of 2009: Amended Section 111(e) of the Emergency Economic Stabilization Act (EESA) to require financial institutions whose TARP funding obligation remains outstanding (over 300 companies), in connecti
51、on with proxy solicitations, to “permit a separate shareholder vote to approve the compensation of executives,” as disclosed pursuant to the compensation disclosure rules of the Commission, which “shall include” the CD and does not limit the ability of shareholders to make proposals related to executive compensation for inclusion in proxy materials.,
