TheCorporateCounsel.net

March 12, 2007

Counterpoint: Executive Compensation Disclosures Not “Overlawyered”

On Friday, I blogged about Chairman Cox’s speech during which he noted that some explanations of executive compensation in proxy statements are running more than 40 pages and yet are not telling investors enough about how the bosses are being paid. He also noted that there is a lack of plain English in some CD&As. And he used the term “overlawyered.”

I received quite a bit of feedback from members that have been working long hours on these disclosures and took offense to the Chairman’s “overlawyered” comment. First, they noted that no one should be surprised that compensation disclosures are running more than 30 pages. This was the page count predicted by most when the new rules were adopted – and this was the length of Pfizer’s compensation disclosure last year when that company made proxy disclosures that roughly complied with the proposed rules that existed at the time.

Some members noted that the new rules are very extensive and companies are concerned about being sued by the SEC or the plaintiffs’ bar if they have not completely described everything. For many companies, there is a need for lengthy narrative disclosure explaining the numbers in the Summary Compensation Table as well as the other tables (eg. yesterday’s NY Times’ column cites an example of a negative “total” number in a a recently filed SCT; that circumstance surely requires some narrative explaining). In fact, as I noted on Friday, I believe that some companies have not provided enough disclosure as it’s hard to follow the dots in their compensation story.

More importantly, quite a few members note that it is the lawyers who are helping to cut through the HR department’s attempt to put boilerplate in the proxy statement. They worry that the Chairman’s comments may backfire as people now have a basis for rejecting the lawyer’s comments, for example: “We don’t really have to disclose the performance goals; you’re just overlawyering this.”

“Say-on-Pay”: What Would Disclosures Look Like?

If Congress passes a law requiring companies to put their compensation arrangements to a non-binding vote by shareholders, what would the disclosures look like? In my mind, that really is the key issue in the debate over whether “say-on-pay” is a good idea. If this issue is resolved, I don’t have a beef with the concept of “say-on-pay” since it would not be Congress attempting to dictate the level of CEO pay through the tax code. Rather, a “say-on-pay” law would merely be Congress allowing shareholders to have a clearer voice on executive compensation arrangements. The risk of unintended consequences is much lower for this type of law compared to tax code shenanigans.

Looking at what other countries that already require “say-on-pay” can help. In the United Kingdom, there are two provisions that make up their law: companies prepare an annual “remuneration report” as required by Chapter 46, Part 15, Chapter 6, Sections 420-422 (ie. the Companies Act 2006) – and companies are required to put the report to an advisory vote by Chapter 9: Section 439.

Here is an old renumeration report from GlaxoSmithKline. This 2003 renumeration report is perhaps the most cited example of such a report because it had just over 50% of the company’s shareholders disapprove of it – and the law then was in its first year of existence. Fyi, in late 2006, the UK adopted the Companies Act 2006 to amend and restate almost every facet of English law that applies to companies – “say -on-pay” was already on the books and restated in the Companies Act 2006. Looking at what UK companies disclose, I think the SEC’s new rules – if properly complied with – elicit the type of disclosure that should allow investors to make an informed voting decision.

How to Find Those CD&As

Some members asked how to find those hundreds of new proxies with CD&As now on file at the SEC. The easiest way is to go to the SEC’s free-text search tool and plug in the search term of: “compensation discussion & analysis” (include the quotation marks).