March 9, 2005

Notes from “SEC Speaks” Are Up!

In our “Conference Notes” Practice Area, we have posted extensive notes from PLI’s “SEC Speaks in 2005.” Thanks to Julie Hoffman for her continued hard work!

The Evolution of Due Diligence Practices (and Securities Act Liability)

Don’t forget tomorrow’s webcast – “The Evolution of Due Diligence Practices (and Securities Act Liability)” – during which Bob Buckholz of Sullivan & Cromwell; Joe McLaughlin of Sidley Austin; and Michael Kaplan of Davis Polk will analyze how diligence practices are evolving in the wake of the WorldCom, the first major court opinion to affect diligence practices in decades.

The 2005 GE Proxy Statement

On Friday, General Electric filed its proxy statement and here is what Mark Borges of Mercer blogged about in his “The Compensation Disclosure Blog” on

Each year, this proxy is chock full of interesting and innovative disclosures, and this year is no exception. Some of the highlights from my initial pass through the report:

– A thorough description of the compensation and benefits for non-employee directors, including charitable gifts and the use of GE appliances under the company’s Executive Products Program. (The proxy statement also describes the company’s liability insurance coverage for directors, which is rarely, if ever, mentioned by companies in their director compensation disclosure.)

– Comprehensive disclosure of all related-party transactions, including a statement by the company that it believes the disclosed transactions were reasonable and in the best interests of the company.

– A description in the Board Compensation Committee Report of all of the components of executive compensation considered in reaching decisions about the specific compensation elements and total compensation paid or awarded to GE’s senior executive officers.

– A discussion of each element of the company’s executive compensation program, broken out by compensation type – base salary, annual bonus, stock options/restricted stock units, career retention RSUs, performance share units, contingent long-term performance awards, and perquisites.

– Extensive disclosure of the various perquisites and other personal benefits for executive officers. The discussion includes the following statement on the company’s executive security program:

“We believe the security costs described in this paragraph are legitimate business expenses, but we also recognize that all of these costs can be viewed as personal benefits. In the interests of full disclosure, we are treating all of these costs as personal benefits for these executives and have reported them as such in the “Other Annual Compensation” column in the {Summary Compensation] table . . . .”

I like the way GE handles this issue. While the company’s stance is at odds with the SEC staff’s position, it avoids a dispute by providing the disclosure anyway (which conforms with its past treatment of security-related benefits). I suspect that some companies that consider security-related travel to be a business expense opt not to provide the disclosure.

– The BCCR also contains specific discussions of (i) the company’s stock ownership requirements for senior executives, (ii) the company’s stock holding period requirements, (iii) the company’s position on stock option expensing (it has expensed options since 2002), (iv) the company’s policy prohibiting stock option repricing, (v) the disposition of outstanding stock appreciation rights in anticipation of the American Jobs Creation Act and new Section 409A, (vi) the company’s policy on the use of employment and severance agreements, (vii) the company’s policy to seek shareholder approval of severance arrangements for any of the Named Executive Officers under certain circumstances, and (viii) the company’s Section 162(m) policy.

– The Summary Compensation Table is very easy to read, extending over two full pages and includes several features seen in prior years’ proxy statements, including a “Total Annual Compensation” column and a break out of the “All Other Compensation” amounts in the table itself (rather than in a footnote).

– A statement in the footnote on executive perquisites indicating that the amounts reported for personal use of corporate aircraft for 2002 and 2003 differ from the amounts reported in prior proxy statements because the company has changed the way it calculates the incremental cost for personal use of the aircraft. Starting in 2004, the company now includes only those variable costs incurred as a result of personal flight activity in the calculation, and excludes non-variable costs, such as exterior paint and interior refurbishment, which would have been incurred regardless of whether there was any such personal use.

– Disclosure of the range of above-market interest rates contingently credited on salary deferred by the NEOs.

While some of the items listed above were first introduced in last year’s proxy statement, GE continues to refine and improve its disclosure each year. They really do a good job of taking the compensation program of a truly complex company and making it readable and informative.