New Proxy Disclosure Rules Target Risk, Compensation and Corporate Governance


  • Improved information for shareholders through additional disclosures
  • Emphasis on qualitative disclosures
  • Effective February 28, 2010
  • All rules except one apply to smaller reporting companies


In response to investors' increased focus on corporate accountability, the SEC expanded proxy disclosure rules affecting risk oversight, corporate governance and director qualifications, and compensation. The SEC believes the amendments "… enhance the information provided in annual reports, and proxy and information statements to better enable shareholders to evaluate the leadership of public companies."


The new proxy disclosure rules were effective February 28, 2010. Companies filing proxy statements or information statements (such as forms 10k or 8k) on or after that date must include these enhanced disclosures. Except for discussion of the relationship of a company’s compensation policies and practices to risk management, all of the new requirements are applicable to smaller reporting companies as well.
The SEC’s amendments can be bucketed as follows:

  • Compensation policies and practices that present material risks to the company;
  • Stock and option awards of executives and directors;
  • Director and nominee qualifications and legal proceedings;
  • Board leadership structure and role in risk oversight;
  • Diversity at the board level;
  • Potential conflicts of interest of compensation consultants that advise companies and their boards of directors.

The most significant of these is the first.  However, it requires careful interpretation. Specifically, a company should present a narrative analysis and discussion only if compensation policies and practices are reasonably likely to have a material adverse effect.   This “reasonably likely” disclosure threshold is critical, and borrows from that used in Management’s Discussion and Analysis (“MD&A”). Another key phrase is “material adverse effect,” through which the SEC intends to reduce “voluminous and unnecessary discussion of compensation arrangements that may mitigate inappropriate risk-taking incentives.” The SEC’s intention is to inform shareholders of corporate compensation policies that motivate employees to create risks that are reasonably likely to have a material adverse effect (think recent financial crisis). If triggered, this discussion must include such policies and practices for all employees, including non-executive officers. The SEC is expecting an insightful, to-the-point narrative rather than pages of mind-numbing information. The final rule lists sample situations where compensation programs may have the potential to raise material risks to companies, and presents examples of the types of issues that would be appropriate for a company to address. Cited situations include a division with significantly different compensation policies and practices, a division where compensation is a significant percentage of revenues, or a division that is significantly more profitable than others. Think you may be affected by this? Consult the SEC’s rule for further guidance. Note:  smaller reporting companies are exempted from this particular disclosure change.

The SEC sought to aid shareholders in their voting decisions concerning whether and why a director or nominee is an appropriate choice for a particular company.  To that end, many of the changes enhance disclosures concerning the background and activities of both present and nominated directors, such as:

  • The particular experience, qualifications, attributes or skills that led the board to conclude that the person should serve as a director for the company (emphasis added).
  • Any directorships held by its directors at other public companies and registered investment companies at any time in the past 5 years.
  • Any legal proceedings for fraud, securities violations or any regulatory disciplinary action involving directors, director nominees and executive officers at any time in the past 10 years.
  • Diversity policies, if they exist, and a company’s definition and consideration of diversity, with respect to directors; including a discussion of how effective such policies are.
  • Any legal proceedings for fraud, securities violations or any regulatory disciplinary action involving directors, director nominees and executive officers at any time in the past 10 years.

Other disclosure changes increased the transparency of how a board functions. Specifically, the SEC is requiring additional information concerning the choice of board leadership structure, for example, why and if the positions of principal executive officer and board chairman are either combined or segregated, and the reason behind that decision.  In a related vein are new disclosures about the board’s involvement in the oversight of the risk management process. The SEC believes this change should provide important information to investors about how a company perceives the role of its board and the relationship between the board and senior management in managing the material risks facing the company. This disclosure requirement stresses “flexibility” in describing how the board administers and oversees its risk oversight function (such as through the whole board, a separate risk committee, or the audit committee, for example), versus a mandatory list of desired information. This may include identifying the specific committee within the board charged with the oversight of the risk process, and it may involve the disclosure of any reporting relationships between those managing risk and the board.

Another compensation-directed modification impacts the value of stock awards and option awards. Companies are now required to disclose the aggregate grant date fair value of awards granted in the fiscal year computed in accordance with FASB ASC Topic 718, with a special instruction for awards subject to certain performance conditions.  Previously, companies were required to disclose the dollar amount recognized for financial statement reporting purposes for the fiscal year.

Acknowledging that many boards and their companies engage compensation consultants, the SEC’s new disclosure requirements in that area will aid shareholders in evaluating any potential conflicts a compensation consultant may have in recommending executive compensation, and the compensation decisions made by the board.  The new rules discuss other services the compensation consultants may be concurrently providing.  Limited exceptions to this are available if the board engages a different consultant than management.


What does this mean for your business? 

The proxy disclosure amendments will impact proxy and information statements, annual reports and registration statements under the Securities Exchange Act of 1934, and registration statements under the Securities Act of 1933 as well as the Investment Company Act of 1940. The SEC also transferred the requirement to disclose shareholder voting results from Forms 10-Q and 10-K to Form 8-K.

Smaller reporting companies are exempted from new disclosures concerning possible material adverse effects arising from risks posed by certain compensation policies and practices.

Although these new rules increase the volume of disclosures, and indirectly thereby the board’s role in risk management, keen managers may also spot opportunities to strengthen the composition of boards, invigorate internal audits’ role in risk management, and refresh compensation procedures and practices, among others.    

For further information: 

For more information please contact:
Margaret F. Gallagher, CPA
Director, Public Companies Group1.866.99.AMPER
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