The Securities and Exchange Commission adopted amendments to its rules in December 2009 that will require enhanced disclosure in proxy statements related to risk oversight, corporate governance and executive compensation. The amendments will become effective Feb. 28, 2010; accordingly, many companies will need to comply with these new rules in their upcoming proxy statements. You can access the SEC’s adopting release at www.sec.gov/rules/final/2009/
33-9089.pdf. The new rules require enhanced disclosures in the following areas:

• the background and qualifications of directors and nominees for director
  
• legal actions involving a company’s executive officers, directors and nominees
  
• the consideration of diversity in the process by which candidates for director are considered for nomination
  
• board leadership structure and the board’s role in risk oversight
  
• reporting of voting results on Form 8-K
  
• the relationship of a company’s compensation policies and practices to risk management
  
• valuation of stock and option awards to company executives and directors
  
• fees paid to compensation consultants

Disclosure Requirements Related to Corporate Governance

Director Qualifications
The new rules require more detailed disclosure of a nominee or incumbent director’s specific experience, qualifications, attributes or skills that led the board to conclude that the nominee or incumbent director should be a member of the board, as well as any public company directorships held by the nominee or incumbent director during the past five years. Previously, the rules only required disclosure of the minimum qualifications to be a nominee, brief biographical information and current public company directorships. Note that there continues to be a separate disclosure requirement regarding the specific minimum qualifications and specific qualities or skills required by the nominating committee for a nominee, and these should be reviewed in connection with considering disclosure for the new rules. In addition, the types of legal proceedings involving directors, executive officers and nominees that must be disclosed have been expanded, and the required look-back period of disclosure of legal proceedings has been extended from five years to ten years.

Diversity Disclosure
The SEC also approved disclosure requirements related to board diversity. The adopted rules do not provide a definition of “diversity,” but rather rely on companies to make the determination based on their own perspectives. The SEC noted that some companies may view diversity expansively to include differences of viewpoint, professional experience, education, skill and other individual qualities and attributes that contribute to board heterogeneity, while other companies may focus on diversity concepts such as race, gender and national origin. The new rules require a discussion of whether the nominating committee or board considers diversity in identifying director nominees and, if so, how diversity is considered. If the nominating committee or board has adopted a diversity policy, the new rules require a discussion of how the nominating committee or board implements and assesses the effectiveness of its diversity policy.

Board Leadership Structure and Rationale
Companies are now required to disclose their board leadership structures and explain the reasoning behind their structures. Specifically, the rules require disclosure of whether and why a company combines or splits the chairman and CEO positions, the reasons why a company believes its board leadership structure is the most appropriate for the company, and whether the board of directors has an independent lead director and, if so, the role of the independent lead director.

Board Role in Risk Oversight
The new rules require disclosure about the board’s role in the oversight of risk and the effect, if any, that this has had on the company’s leadership structure. This requirement is intended to provide investors with an understanding of how the board administers its oversight function, such as through the entire board, a separate risk committee or the audit committee. In the adopting release, the SEC enumerated credit risk, liquidity risk and operational risk as some of the risks that companies face.

Reporting of Voting Results
Companies are now required to disclose the results of any shareholder vote on Form 8-K within four business days after the end of the meeting. Previously, the disclosure was required in a company’s Form 10-K or Form 10-Q for the period in which the vote occurred.

Disclosures Requirements Related to Compensation

Compensation Policies and Practices as Related to Risk Management
Companies will be required to provide narrative disclosure about their compensation policies or practices for all employees generally, not just executive officers, if the compensation policies and practices create risks that are reasonably likely to have a material adverse effect on the company. This is intended to elicit disclosure about compensation policies and practices that are most relevant to investors and generally assist investors in determining whether a company has established a system of incentives that can lead to excessive or inappropriate risk taking by employees. The SEC further noted that, in assessing whether disclosure is required, companies can take into account controls and other elements that may mitigate the probability or potential impact of compensation policies that might otherwise create risk. This disclosure requirement will not be part of the Compensation, Discussion and Analysis and will not apply to smaller reporting companies.

Reporting of Options and Other Equity Awards
Reporting of compensation awarded during the year related to stock and option awards in the Summary Compensation and Director Compensation Tables will now be based on the aggregate grant date fair value of the awards under FASB ASC Topic 718 (formerly FAS 123R). The prior rule required disclosure of the annual amount expensed under FASB ASC Topic 718. Companies with fiscal years ending on or after Dec. 20, 2009, will also be required to recompute amounts included in the Summary Compensation Table for prior years based on the new standard. A new instruction to the Summary Compensation Table, the Grants of Plan-Based Awards Table and the Director Compensation Table clarifies that for awards subject to performance conditions, the amount to be included in the table is the value at the grant date based on the probable outcome with respect to satisfaction of the performance condition, consistent with the recognition criteria in FASB ASC Topic 718 (excluding the effect of estimated forfeiture), not the maximum potential value of the award. The maximum potential value would be disclosed in a footnote to the Summary Compensation and Director Compensation tables.

Fees Paid to Compensation Consultants
Companies will be required to provide enhanced disclosure related to any consultant that provides both executive compensation and additional services (e.g., benefits administration, human resources consulting and actuarial services) if the fees for additional services exceeded $120,000 during the company’s last completed fiscal year. The enhanced disclosure must address the aggregate fees paid to the consultant and its affiliates for executive and director compensation services as well as the aggregate fees paid for additional services. If the consultant was engaged by the compensation committee, the company must also disclose whether management made or recommended the decision to engage the consultant or its affiliates for additional services and whether the board or compensation committee approved the additional services. The new rules include an exception if the executive and director compensation services are limited to broad-based plans or the provision of general information, such as surveys, that is not tailored for the company or that is based on parameters that are not developed by the consultant and about which the consultant does not provide advice.

Conclusion
Companies should communicate the new rules to the board and certain of its committees (particularly the nominating committee and the compensation committee) so that directors are prepared to consider these rules in making nominations and compensation decisions. Companies should also review their disclosure controls and procedures (including updating director and officer questionnaires) and board policies in the context of these new disclosure requirements. In addition, those responsible for preparing proxy disclosure should begin drafting certain portions of the proxy statement early to address the new disclosure requirements, including the disclosure regarding director qualifications and diversity as well as risk management. Lastly, companies should review the services provided by compensation consultants and existing policies and practices regarding the retention of compensation consultants. As a best practice, the compensation committee should be aware of and approve of all services provided to the company by the consultant that advises the compensation committee on executive compensation.

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