Updated PCAOB and SEC FAQs on Internal Controls
Yesterday, the PCAOB staff added three new FAQs on Auditing Standard No. 2 to the 26 FAQs that were issued in June. These FAQs are now in two separate PDFs on the PCAOB's site.
In addition, the SEC's Corp Fin updated its June FAQs on Section 404 management reports to clarify the answer to Question 3 to describe a Type 2 SAS 70 report and to address five new frequently asked questions (see Questions 19 through 23). The SEC's changes were made to the June FAQs - so that all of their FAQs are in one document.
CII Updates Executive Compensation Policy
The Council of Institutional Investors has just updated its policy regarding executive compensation (the policy is not yet posted on their site) - and it includes many elements that we recommended in our 12 steps to responsible compensation practices (as written in the May-June and Sept-Oct issues of The Corporate Counsel). This is a significant development as CII doesn't adopt or modify its policies without consensus among its 130 pension fund members (whose assets exceed $3 trillion).
The policy calls for quite a number of dramatic changes in compensation practices. Just in the disclosure area alone, consider these points to see how CII seeks to advance the ball well beyond what is required by S-K:
· Overview - Compensation committee is responsible for ensuring that all aspects of executive compensation are clearly, comprehensively and promptly disclosed, in plain English, in the proxy statement - regardless of whether such disclosure is required by current rules and regulations.
· Benchmarking - If benchmarking is used, disclose the peer group companies – and if the peer group is different from that used to compare overall performance, describe the differences between the groups and the rationale for choosing between them. Also disclose targets for each compensation element relative to the peer/benchmarking group and year-to-year changes in companies composing peer/benchmark groups.
· Salary - Disclose rationale for paying salaries above median of the peer group.
· Annual Incentive Compensation – Fully describe qualitative and quantitative performance measures and benchmarks used to determine annual incentive compensation, including the weightings of each measure. At the beginning of a period, disclose the maximum compensation payable if all performance-related targets are met – and at the end of the performance cycle, disclose actual targets and details on the determination of final payouts.
· Long-Term Incentive Compensation – Fully and clearly disclose a well-articulated philosophy and strategy for long-term incentive compensation – including size, distribution, vesting requirements, other performance criteria and grant timing of each type of long-term incentive award granted to the executive oversight group and how each component contributes to the company’s long-term performance objectives. Disclose whether and how long-term incentive compensation may be used to satisfy meaningful stock ownership requirements – and whether the committee imposes post-exercise holding periods or other requirements.
· Dilution - Disclose the philosophy regarding dilution including definitions of dilution, peer group comparisons and specific targets for annual awards and total potential dilution represented by equity compensation programs for the current year and expected for the subsequent four years - including a table detailing the overhang represented by unexercised options and shares available for award and a discussion of the impact of the awards on earnings per share.
· Stock Option Awards - Fully describe the qualitative/quantitative performance measures and benchmarks used and the weightings of each component – and whenever possible, include details of performance targets.
· Perquisites - Total perquisites should be described, disclosed and valued.
· Employment Contracts, Severance and Change-of-Control Payments – Fully and clearly describe the terms and conditions of employment contracts and other agreements/arrangements and reasons why the committee believes the agreements are in the best interests of shareowners – including tabular disclosure of the dollar value payable, including gross-ups and all related taxes payable by the company under each scenario covered by the contracts/agreements/arrangements.
· Retirement Arrangements – Disclose the terms of any deferred compensation, retirement, SERP or other similar plans, along with a description of any additional perquisites or benefits payable to executives after retirement – including a single table that details the expected dollar value payable to each executive under any deferred compensation, retirement, SERP or similar plan, along with a dollar value of any additional perquisites of benefits payable after retirement.
· Stock Ownership - Disclose stock ownership requirements and whether any members of the executive oversight group are not in compliance.
Learn how to handle these new disclosure demands during the panel - "What Now Needs to Be Disclosed in the Proxy Statement" - of our October 20th compensation conference.