Transcript Broker Non

Update on SEC’s
Proxy Disclosure
Enhancements
CBA Securities Subsection Luncheon
February 18, 2010
Christine M. Daly
Martha Dugan Rehm
[email protected]
303-866-0486
[email protected]
303-866-0464
www.hro.com
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Denver Boulder Colorado Springs Dublin London Los Angeles Munich Phoenix Salt Lake City San Francisco
SEC’s New Corporate Governance
and Compensation Disclosure - Timing
• Proposed - 7/10/2009 (Rel. No. 33-9052)
• Adopted - 12/16/2009 (Rel. No. 33-9089)
• Effective – 2010 Proxy Season
• FYE on or after 12/20/2009
• File proxy statement (or Form 10-K) on or
after 2/28/2010
• Compliance and Disclosure
Interpretations (CD&I’s - 12/22/2009)
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SEC’s New Corporate Governance
and Compensation Disclosure - Rules
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Reg. S-K, Item 401 (Directors, etc.)
Reg. S-K, Item 402 (Exec. Comp.)
Reg. S-K, Item 407 (Corp. Gov.)
Form 8-K (Current Reports)
Forms N-1A, N-2 and N-3 (registered
investment companies)
• CD&I’s - 1/20/2010 and 2/16/2010
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SEC’s New Corporate Governance
and Compensation Disclosure - Areas
• Compensation practices, including risk
assessment
• Director qualifications, background; diversity
as factor in nominee selection
• Board leadership structure and risk oversight
• Compensation table, reporting equity awards
• Compensation consultant disclosure
• Election results accelerated (4 bus. days)
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Compensation Risk Assessment
• Investors and regulators are concerned about
compensation arrangements that encourage
excessive risk taking
• The company’s overall compensation program should
include a risk analysis and appropriate controls
• RiskMetrics – at a minimum talk about the company’s
risk assessment process and mitigating features of its
comp program (e.g., claw-backs and bonus banks)
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Compensation Risk Assessment
Step 1: Perform a risk assessment of
the company’s overall compensation
policies and practices
Step 2: Include narrative disclosure
where risks arising from compensation
practices are reasonably likely to have a
material adverse effect on the company
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Compensation Risk Assessment
• Examples that may trigger disclosure:
• business unit carries significant portion of
company’s risk profile
• business unit with compensation structured
significantly different
• business unit that is significantly more profitable
• business unit where comp expense is a significant
percentage of the unit’s revenues
• payment of bonus when goal achieved, while the
income and risk to the company extend over a
significantly longer period of time
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Compensation Risk Assessment
• What may need to be disclosed:
• the general design of the program and its
implementation
• the company’s risk assessment or incentive
considerations in structuring the policies and
practices or in awarding or paying the comp
• mitigating factors such as claw-backs or holding
period requirements
• policies regarding adjustments to comp policies and
material adjustments made
• the extent to which the company monitors its comp
program to determine whether its risk objectives
are met
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Director Qualifications and Background
• Old Item 401(e) and (f) for directors /
nominees
• 5 years business experience
• 5 years legal proceedings
• Current directorships
• New Item 401(e) and (f)
• Extends legal proceedings look back, 10 years
• Extends directorships look back, 5 years
• Adds other legal proceedings (e.g., SRP
sanction; mail fraud) - material
• Adds individual qualifications
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Individual Director Qualifications
• Each director/nominee, not group
• Specific and particular experience,
qualifications, attributes or skills
• Board focus, not committee service
• Determined as of time of the filing
• Applies to classified board
• Goal is to disclose current information about
all directors of why board concluded person
should serve or continue serving as of the time
of the filing
• IR aspect of proxy statement
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Diversity in Director/Nominee Selection
• Old Item 407(c) – describe process for
selecting nominees (retained)
• New Item specifically requires new disclosure
if (and if, how) diversity is considered in
selection nominees/directors
• Disclose diversity “policy” (beware . . .)
• If have policy, how implemented and assessed
• No definition of “diversity” (one size does not
fit all)
• Not in proposed rules
• Encourage “diversity”?
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Board Leadership Structure
• New Item 407(h)
• Board leadership structure
• CEO/Chair combined or not
• Why chosen structure is appropriate
• Lead independent director existence and
role, if CEO/Chair is combined
• Goal of transparency, not to dictate
structure of leadership
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Board Role in Risk Oversight
• Disclosure of how company perceives role of
board and senior management in managing
material risks
• No definition of risk (but credit, liquidity,
operational risks)
• Process oriented, not substantive risk disclosure
• Manner in which board administers oversight
• Structure of risk oversight (e.g., risk committee;
reporting relationships; information receipt)
• Effect oversight function has on leadership
structure
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Reporting of Equity Awards
• Change in amount reported for equity awards in
Summary Compensation Table and Director
Compensation Table
• Old rule – expense allocated over award’s expected
term (e.g., 25% of 2009 option; 25% of 2008, 2007,
and 2006 options) as reported in the financial
statements
• New rule – 100% of grant date fair value reported in
year of grant (regardless of vesting or expected term);
performance award reported in table at “probable
outcome” with footnote of maximum payout
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Reporting of Equity Awards
• Transition rule – must restate prior year
numbers, including Total Compensation,
for 2008 and 2007
• May change who in current year is one
of the top paid executive officers (e.g.,
new hire grant or performance award)
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Reporting of Equity Awards
Name
EXAMPLE – ELI LILLY AND COMPANY
Year
Stock
Options
Total Comp
NEW RULE – 2010 Preliminary Proxy
John Lechleiter 2009
$11,250,000
2008
$ 8,125,000
2007
$ 4,972,500
$0
$0
$0
$20,927,649
$14,481,882
$ 9,274,015
OLD RULE – 2009 Proxy Statement
John Lechleiter 2008
$ 6,621,333
2007
$ 4,641,000
2006
$ 3,510,000
$0
$ 390,000
$3,967,976
$12,978,215
$ 9,332,515
$11,305,093
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Compensation Consultant
• Disclose fees paid to compensation consultant
and potential conflicts of interest
• Where board or comp committee has engaged
its own consultant and the consultant received
more than $120,000 during the fye, disclose:
• fees paid for board and non-board services
• whether decision to engage consultant (or its
affiliates) for additional services to the company
was made or recommended by management
• whether board or committee approved the other
services provided to the company
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SEC Comments
• Trends in SEC comments:
• Peer group and benchmarking (“competitive;”
describe how peers selected and data is used;
disclose where actual payments fell in range)
• Performance targets (disclose any material
performance targets; identify the specific targets;
disclose actual results)
• Compensation Discussion and Analysis (shorten
background and process-oriented information;
include “how” and “why”)
• SEC change in position – will require
amendment of filings if material deficiency
(instead of “futures” comment)
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Director Elections - Impact
• Broker non-votes (NYSE Rule 452)
• Direct proxy access
by shareholders (proposed rule 14a-11)
• Proxy disclosure enhancements
(adopted 12/16/2009)
• Accelerated results – Form 8-K within
4 business days
• Proxy advisory firms more active
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Broker Non-Votes
• No broker discretionary voting in director
elections
• Primary effect – lower retail vote turnout
• Ensure that proxy includes a “routine”
proposal (e.g., ratify auditors) so broker
votes count for quorum
• Analyze impact s/h base and state law
• Review and modify description of “vote
required” and “how votes are counted”
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Update on SEC’s Proxy
Disclosure Enhancements
CBA Securities Subsection Luncheon
February 18, 2010
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