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SEC Staff Starts to Comment on Absence of Compensation Risk Disclosure; Say-On-Pay Update

(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.)

May 6, 2010

New Item 402(s) under Regulation S-K requires public companies to assess whether risks arising from the registrant’s compensation policies and practices are reasonably likely to have a material adverse effect on the registrant. If so, the company must make a variety of disclosures about the company’s compensation practices as they relate to risk management. Smaller reporting companies are exempted from the requirement.

In making the assessment, the companies generally consider the features of the compensation program that mitigate risk. As previously reported in this blog in a post called "Disclosures of Compensation Risk: A Brisk Discussion of Risk," companies have generally concluded that their compensation policies are not reasonably likely to have a material adverse effect. Even though this conclusion makes disclosure unnecessary under Item 402(s), many (if not most) companies have voluntarily elected to include a disclosure in their proxy statements. Generally this consists of a few paragraphs, disclosing that the compensation committee or the full board made the risk assessment, the factors they considered, and some conclusion about the risk profile of the company’s compensation. Other companies have been silent, as permitted by the rules.

Mark Borges has reported in his Proxy Disclosure Blog (subscription service) that the SEC staff has started to issue comments to companies that are silent about compensation risk in their proxy statements. The staff comments request additional information on the risk assessment. In fact, some companies have received the comment even if they included a statement in the proxy statement about their conclusion but did not describe the risk assessment process.

Comment: Borges concludes, and I agree, that the staff is not requiring every company to make a disclosure. However, I think it is a good idea for public companies to include some disclosure on the process and the conclusion. Not only does this reduce the likelihood of a staff comment, but it shows investors that the compensation committee and/or the board engaged in a thorough and thoughtful process to assess compensation-related risk.

Say-on-Pay Proposals May No Longer Be a Slam Dunk

Last year, in a post called “Say-on-Pay Play-by-Play,” I reported that Say-on-Pay, a shareholder advisory vote on executive compensation, often results in an overwhelming vote for approval of the compensation. I reported on the election results for some companies that held advisory votes last year, mainly financial institutions that, as TARP recipients, were required to hold such advisory votes. The percentage vote in favor of approval ranged from 70 percent to 93 percent.

However, the landscape for Say-on-Pay votes may be changing. In “Investors Reject Motorola’s Pay Practices” in the RiskMetrics Blog, Ted Allen reported this week that in Motorola’s advisory vote, just 46 percent of the vote was in favor of the proposal, resulting in the proposal being defeated. In another post, Allen reported that American Express received a 37% negative vote and Wells Fargo received a 27% negative vote (compared to a 7% negative vote a year earlier).

Further, as Broc Romanek reported in “Proxy Season Look-In: How Say-on-Pay is Faring So Far” in Blog, the affirmative vote would have been even lower if brokers had not been able to cast discretionary votes for the proposals. Romanek notes that one of the provisions of the Restoring American Financial Stability Act of 2010 (1,410 page PDF) (the “Dodd Bill”), would eliminate brokers’ ability to cast discretionary ballots in such an advisory vote. Brokers would be required to receive timely instructions from street name holders in order to vote the shares for such a proposal. This change would make it even more difficult in the future to get approval for Say-on-Pay votes.


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