New US Proxy Disclosure Requirements: 2010 FAQ


US Proxy Disclosure Requirements: FAQ

 

The Securities and Exchange Commission voted in December to finalize a new set of proxy disclosure rules, including requirements related to “risky” compensation, director qualifications, compensation consultant fees and services, and more information about the board’s leadership structure, oversight of risk management, and consideration of diversity in the director nominating process. The new requirements are effective for proxy statements issued on or after Feb. 28, 2010, by companies with a fiscal year ending on Dec. 15, 2009 or later, so they will apply to most proxy statements issued for the 2010 season.

This FAQ was prepared in response to questions arising regarding how RiskMetrics Group’s (RMG’s) voting policy may apply to some of the new disclosures. The questions and answers here are intended to provide high-level guidance regarding the way in which the RMG Research Department will generally view certain issues in the context of preparing proxy analyses and vote recommendations for U.S. companies. However, these responses should not be construed as a guarantee as to how RMG’s Research Department will apply its benchmark policy in any particular situation.

 

Frequently Asked Questions

What will RiskMetrics be looking for in the new disclosure requirement on risks raised by compensation programs? In particular, how will RMG react to non-disclosure?

RMG understands that issuers typically do not like to provide negative disclosures (e.g., “we found no material adverse risks caused by compensation”) due to concerns over liability, and the SEC generally does not require them to make such statements. As a result, some companies may choose to say nothing in their proxy statement this season with regard to searches for material adverse effects from pay which conclude there are no such risks. While RMG does not have a policy regarding non-disclosure, we advise issuers to, at a minimum, talk about their process and any mitigating features (such as claw-backs or bonus banks) that they have adopted. We view this disclosure as an opportunity for communication, not simply compliance, and we expect that shareholders will be looking for a reasonably substantive discussion of the board’s process to determine whether the company's incentive pay programs might motivate inappropriate risk-taking, and what they are doing to mitigate that.

How will RMG analyze compensation consultant fee disclosures? Will RMG apply some type of formula where concerns will be raised if fees for other services exceed fees for compensation consulting?

RMG will not apply formulas or any specific policy with regard to compensation consultant fees. As this data is brand new, we will be analyzing it after proxy season and will then develop, in consultation with clients, any policy guidelines that are warranted.

Regarding the new disclosures on director qualifications, diversity policies, and board leadership and oversight of risk management, what are RMG’s views and the prospects for related voting recommendations?

As with the other disclosure enhancements, it’s too early to speculate about potential policy changes. We believe that shareholders will welcome additional information clarifying directors’ qualifications; this information will not be determinative in any recommendation but rather will provide additional insight that may be considered in overall evaluations, as warranted. With respect to board leadership and diversity and the board’s oversight of risk management, RMG has not made any policy changes related to director elections in 2010. We look forward to seeing substantive discussion of these issues, and will incorporate meaningful information into analysis of related shareholder proposals, as appropriate, although RMG policy regarding those proposals is unchanged for 2010 (see U.S. Summary Guidelines).