The new executive comp disclosures, effective for the proxies of the next wave of calendar year end filers, promise to bring some much-needed clarity to the subject so near and dear to the financial journalist community. And there are a few subtleties to them to which the press hasn’t devoted much attention.
On Monday, John White, the SEC’s Director of the Division of Corporation Finance delivered a speech to the “Practising Law Institute Fourth Annual Directors’ Institute on Corporate Governance” on the new disclosures, shedding light on on some aspects of the disclosures that will impact managers and directors - in more ways than just the recitation of a comp figure, with the attendant “Holy Cow!” exclamation by proxy readers.
One change brought by the standard has to do with the new “Compensation Disclosure & Analysis” to be found in the proxy and 10-K. This replaces the old “Board Compensation Committee Report on Executive Compensation” with a “principles-based” disclosure about compensation. (White elaborated on the “principles-based” disclosures in a prior speech this month.) While the format itself will be different, it will also be a corporate disclosure - not a statement by the board’s compensation committee. As a corporate disclosure, it will be subject to the CEO/CFO certifications that have brought changes in the “tone at the top,” according to Chairman Cox. That increases the pressure on firms to actually produce robust, non-evasive disclosures - or face the stiff consequences of failure to fulfill SarbOx Section 302 obligations.
Another aspect of the new comp rules that don’t get much airplay: the effect they’ll have on directors. According to White:
Director compensation for the last fiscal year will now be required to be disclosed in a new Director Compensation Table (along with related narrative), which will be similar in format to the Summary Compensation Table that is the primary vehicle for disclosing the amounts of your executives’ compensation. As with executives, companies will be required to disclose one total number for a director’s compensation, which will include the dollar value of option grants to directors and perquisites, among other compensation.
As the H-P (NYSE:HPQ) soap opera shows, there are all kinds of, shall we say, “interactions,” among board members - and managers, too. The degree to which any interactions in any dysfunctional board might be affected by compensation should be clearer starting next year. It’ll provide a rich arsenal of ammunition for the corporate activists.