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Risky Business - A Panel Discussion on the New Proxy Risk Disclosures

(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.)

February 28, 2010

At last week's meeting of the Twin Cities Chapter of the National Association of Stock Plan Professionals, I was the moderator of a very interesting panel discussion on the new compensation risk disclosures required in the proxy statements of public companies.

My fellow panelists were two nationally known compensation consultants: Don Delves of The Delves Group and Henry Oehmann of Grant Thornton.

The panel discussion centered around new Item 402(s) of Regulation S-K, recap printed in the panel's course materials, and the underlying risk analysis that the compensation committee needs to perform to back up the risk disclosure. Don and Henry each included articles in the course materials that discuss the analysis of the relationship between compensation and risk, and the features of compensation programs that can mitigate risk.

We are preparing a transcript of the panel discussion, which I will make available to readers of this blog. A few highlights:

  • Henry gave very useful background about the origins of the compensation risk analysis concept. The analysis is most helpful in the financial institutions industry, where risk is inherent in the business and the risk management function is more developed. In non-financial industries, one benefit of the analysis may be an increase in the visibility and sophistication of the enterprise risk management function of public companies.
  • Don led a discussion of the process to be followed by a public company in conducting a compensation risk analysis. He recommended creating a task force of members of the company's internal financial, legal and HR teams. He also pointed out that Item 402(s) contains a laundry list of situations that might present compensation risks - divisions responsible for a disproportionate part of the company's earnings, etc. The task force can use this list as one point of reference for determining which compensation elements on which to focus.
  • I led a discussion of the actual disclosure required under Item 402(s). Many practitioners are recommending that, if the "reasonably likely" standard is not met, the proxy should be silent on the subject of compensation risk. I take a different view. First, the existing CD&A rules already require a discussion of the objectives of the program, and several of the suggested disclosure items under Item 402(b) would require a discussion of risk mitigation as a reason for specific compensation elements (of executives officers only). Second, I think it is helpful to put these CD&A disclosures in context by informing the reader that the compensation committee worked with management to conduct the required risk analysis, and by describing the conclusions of the process.

More Changes in the ON Securities Cheat Sheet

  1. I moved the SEC developments and other regulatory matters up to the first page.
  2. In the description of the proposed legislation on the second page, I updated the references to the financial reform bill introduced by Rep. Barney Frank.
  3. In response to questions from a couple of blog readers, I added a description of the elements of the draft bill released by Senator Christopher Dodd, even though it has not yet been formally introduced. 


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