October 22, 2007

Executive Compensation Disclosure Best Practices from RiskMetrics Group

It seems to be the season for reports on executive compensation disclosure. Following up on the SEC Staff’s recent report on observations from its review efforts, RiskMetrics Group has published its own evaluation of executive compensation disclosures from the 2007 proxy season.

Mark Borges provides an extensive summary and analysis of the report on his blog. Mark notes: “Less a critique of how companies fared in disclosing their executive compensation programs than the kick off of a dialogue among executives, directors, and investors on the development of a set of disclosure ‘best practices,’ the Report is the first public statement that I’ve seen from the investor community (or at least, one of its leading representatives) commenting on compliance with the new rules.

Like the Staff report, RiskMetrics focuses much of its attention on the Compensation Discussion and Analysis. Nonetheless, the Report should also be read in the context of preparing the tabular disclosure and accompanying narrative discussions. At a high level, the Report addresses seven specific topics:

– Clarity and accessibility for investors and other key reads
– The connection between compensation practices and strategy or other company-specific features
– The role of executives and compensation consultants in the compensation-setting process
– The pay mix
– Performance metrics and peer groups
– Performance results, payouts, and pay-for-performance links
– A holistic picture, in which the whole is greater than the sum of the parts

In many ways, RiskMetrics uses these topics to expand, from an investor’s perspective, on the Staff’s two principal messages: (1) the CD&A should focus on how and why a company arrives at specific executive compensation decisions and policies, and (2) the manner of presentation matters — in particular, using plain English and organizing the tabular information in a way that helps an investor understand a company’s disclosure.”

Business Roundtable Reports on Corporate Governance

Recently, the Business Roundtable announced the results of its Fifth Annual Corporate Governance Survey. For the survey, the Business Roundtable polled it membership, consisting of 160 CEOs of large US companies. Among the most notable trends from the survey is an increase in independent directors (90% of respondents had boards that were at least 80% independent), as well as a significant jump in the number of companies that have adopted majority voting (82% of the responding companies).

The survey results also included the following:

– Sarbanes-Oxley spending continues to decline, with moderate decreases in costs expected with the new SEC/PCAOB internal controls guidance.
– 75% of CEOs serve on no more than one other public company board.
– A still surprisingly low 38% of companies responding indicated that board members met with shareholders in the past year.
– 71% of respondents expect their non-management or independent directors to meet in executive session at every board meeting.
– 40% of companies responding indicated that they adjusted the pay-for-performance element of senior executive compensation in the past year, in addition to 57% that reported doing so in 2006.

SEC Passes on Zions Bancorp Option Auction

As noted in this article from today’s Wall Street Journal, Zions Bancorp received a letter from the SEC’s Chief Accountant indicating that the Staff had no objection to the bank’s use of results from its ESOARS auction model for computing options expense under FAS 123(R).

As Broc noted in the blog earlier this year, Zions had received a letter in January from the SEC’s Chief Accountant indicating concurrence with their approach, but noting concerns with the auction process. The Council of Institutional Investors then wrote a letter to the SEC expressing concerns about whether market instruments such as ESOARS can appropriately value employee stock options. It appears that the Staff’s latest letter will clear the way for Zions to market its ESOARS to other companies as an alternative option valuation methodology.

– Dave Lynn