(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)
Of all the new proxy statement disclosure requirements, the compensation risk discussion under new Item 402(s) of Regulation S-K is probably the trickiest. If the compensation committee of a public company concludes that the risks arising from the company's compensation policies and practices are "reasonably likely" to create a material adverse effect on the company, then the company is required to make the disclosures identified in Item 402(s).
Of course, no compensation committee is going to want to make that disclosure. If the committee believes the company's compensation practices are likely to create a material adverse effect, in most cases, the committee will make changes to the compensation structure to reduce that likelihood. Therefore, in most cases, companies will come to the conclusion that they are not required to make the Item 402(s) disclosure. In that case, will most companies be silent in the proxy statement, or will they make a voluntarily disclosure?
The Corporate Counsel Blog last week pointed out three preliminary proxy statements filed under the new rules. See the filings for Eli Lilly and Company, Fortune Brands, Inc. and Analog Devices, Inc. All of these proxy statements contain a voluntary disclosure about compensation risk, and they are all helpful examples. They briefly describe the process the committee used and focus mainly on the features of their compensation programs that mitigate risk.
All in all, I would guess that most companies will elect to say something in their proxy statements about the risk aspects of compensation. I think this is a good opportunity for the compensation committee to communicate something positive about its process. Also, note that, as in the Eli Lilly and Fortune Brands proxy statements, the Item 402(s) discussion ties nicely into CD&A, which discusses the elements of the executives' compensation meant to discourage excessive risk-taking.
One more note: there may be an unexpected downside to staying silent, even if Item 402(s) allows the company to do so. Mark Borges' Proxy Disclosure Blog (a subscription blog) last week reported on an interesting statement by an SEC staffer at the recent SEC Speaks conference in Washington, D.C. Apparently, if a company does not make any disclosure about material adverse compensation risks, the SEC staff in its next review will issue a comment asking the company to explain the analysis used to make its determination that no disclosure was required. Of course, the company's response to the comment will be publicly available fairly quickly after the response is filed.
SEC Issues New Release on Climate Change Disclosure - Your Chance to be Sustainable!
As has been widely reported, on February 2, 2010, the SEC issued its interpretive release on disclosures of the consequences of climate change. The SEC's interpretations are effective immediately, so the release is must reading for anyone responsible for disclosures at a public company.
The Federal Register version of the release is now available. This version prints out on 9 pages rather than 29 pages - a fabulous way to save paper and start your own "green" revolution in staying current with SEC requirements!