The Corporate Library Blog

New SEC Guidance: Corporate Disclosure of Material Climate Change Risks and Opportunities

The SEC just issued ground-breaking guidance requiring corporate disclosure of material climate change risks and opportunities. A report The Corporate Library authored for CERES last spring, which surveyed current climate risk disclosure and found it lacking, was part of the movement that made this happen.

SEC Announces Hearing on Investors' Call for Climate Risk Disclosure

The SEC has announced it will hold an open meeting on the petition from Ceres and the Environmental Defense Fun (EDF) asking the SEC to provide interpretive guidance outlining climate-related "material risks" - such as new regulations, physical impacts, new economic and business opportunities and other climate-related trends - that companies should be disclosing to investors. The petition was signed by 20 organizations, including leading U.S. and Canadian institutional investors managing more than $1 trillion in assets.

The meeting will be held January 27, 2010.

New SEC Disclosure Rules on Board Leadership Structure

The SEC’s enhanced proxy disclosure rules related to corporate governance and executive compensation matters will be effective for proxies filed after February 28th. The part of these new rules I am most excited about is the enhanced disclosure regarding board leadership.  Companies will have to provide detailed information regarding their board leadership structure, including “whether and why it has chosen to combine or separate the principal executive officer and board chairman positions, and the reasons why the company believes that this board leadership structure is the most appropriate structure at the time of filing.”  If the roles of principal executive officer (AKA CEO) and board chair are combined, the company will have to discuss its decision regarding the designation of a lead independent director.  In July when I blogged about the proposed rules regarding the lead director disclosure, I wrote:

A positive change that we would see if these rules are adopted is more meaningful information about the roles and responsibilities of the lead independent director. However, companies should also have to disclose their reasoning if they have combined the roles of CEO and Chair of the Board and NOT created the position of lead independent director (or a similar position).  Surprisingly, there are many US companies which fall into this category.

Now that the rules are finalized and soon we will see proxies with these discussions regarding board leadership structure, I wanted to see how many companies with a combined CEO and board chair will be in the position of explaining why they do not think it is “appropriate” to name an independent director as lead director.  I was amazed when I searched our Board Analyst database and found that, as of December 28, 2009, more than 700 companies in the Russell 3000 index have one person serving as both CEO and board chair and have not named an independent director as lead director.

To be fair, I should point out that we at The Corporate Library have a high standard for what we consider the designation of a lead director.  We only consider a company to have a lead director if they specifically provide the name of a single lead (or presiding) director for the board.  Only when shareholders are provided the name of an individual who has been given the title of lead (or presiding) director and will be held accountable for serving as the ongoing leader of the independent directors of the board is a company considered to have a lead director in our database.

For example, we do not consider a board to have a lead director if they report that the independent directors or chairs of the board committees rotate in the role of lead director.  This is the case at several large US companies. Similarly, if the board designates someone to be the lead director simply because of their role as the chair of the board or a certain committee, we do not consider that board to have a lead director.  Some boards select the person who will serve as lead director, by leading the executive session meeting, by stating that it will be the person who chairs the committee which has responsibility for the issue to be discussed at that particular meeting.

Our concern with these and other similar approaches is that while they only effectively determine who will lead any given executive session; they do not name a person who is consistently responsible for truly serving as an independent leader of the board and who can be held accountable by shareholders.

Of the more than 1,500 companies in our database which have combined the roles of CEO and board chair, we consider only about half to have named a lead director.  When I narrowed the search in our database to consider only S&P 500 companies, I found that more than 100 companies with a combined CEO and board chair had not named a lead director as of December 28, 2009.  We will be watching these companies as they file their proxies in the coming months to see how they justify this lack of independent board leadership.

Annalisa Barrett - Senior Research Associate

Final rules on compensation from the SEC

In a December 16 meeting, the SEC finalized its rules on proxy disclosures about compensation and a range of other factors, including director qualifications and filing votes at annual meetings. The rules will be effective from February 28, 2010, just in time for the proxy rush next season.

While there are a bunch of changes, frankly, I remain unimpressed about the extent of change.

Quite a bit about the final rules has changed from the draft rules that came out on July 1 (I blogged about those here). Except, of course, one thing that did not change was the one piece of it that I actually wanted them to change.

I mean, I know no one reads my blogs – well no one with the first name of Lloyd – but this was a letter to Mary Schapiro and I know she, or someone at the SEC, must have read that. But, no, the summary compensation table is going to include the estimated grant date value of equity awards along with the actual salary, actual bonus, actual benefits, actual etc. So it will still be a nonsensical mixture of different kinds of compensation.

On the other hand, looking on the bright side, this means that the discerning pay analyst will still have to subscribe to Board Analyst to find out exactly what executives actually made during the year because sure enough the summary compensation table ain’t gonna tell them.

One good thing, though, the rules state that, for fiscal years ending on or after Dec. 20, 2009, companies will be required to present recomputed disclosure for all fiscal years included in the tables, so at least as far as that’s concerned we’ll have apples to apples.

While that bit didn’t change, companies will be required to assess if their compensation policies and practices for all employees, not just executive officers, create risks that are “reasonably likely to have a material adverse affect on a company.” How much real, meaningful information will come out of the exercise remains to be seen.

The SEC stepped back, though, on its requirements for the disclosure of compensation consultant fees. Instead of just getting it all out there, which would have been much simpler, thresholds and exclusions were adopted.

Well, hey, how can you keep on producing 137-page documents if you keep things simple?

Fees won’t have to be disclosed if the amount of additional services provided to the company by the consultant or an affiliate is less than $120,000 during the company’s fiscal year. The requirement also makes an exception for consulting on broad-based plans such as 401k)s or health insurance plans, and other services such as surveys… so that’s just about everything then.

Expect few disclosures in this area, therefore.

Paul Hodgson - Senior Research Associate

SEC Rules on Board Leadership Disclosure

In the proposed rules on “Proxy Disclosure and Solicitation Enhancements” (find them here: http://www.sec.gov/rules/proposed/2009/33-9052fr.pdf) published in the Federal Register, on Friday, July 17th, the SEC is proposing that companies report details regarding the company’s current leadership structure in their proxy and information statements.  Specifically, the new disclosure rules would require companies to address the following issues:

• “whether and why they have chosen to combine or separate the principal executive officer and board chair positions”
• “whether and why the company has a lead independent director, as well as the specific role the lead independent director plays in the leadership of the company” (applies only to those companies where the “role of principal executive officer and board chairman are combined, and a lead independent director is designated”)
• “why the company believes [the current structure is] the best structure for it at the time of the filing"

If adopted, the new rules would be effective for the 2010 proxy season.  According to the SEC, the intention of the rule is to “provide investors with insights about why the company has chosen that particular leadership structure.”

Hopefully, under these new rules, companies would discuss any leadership structure they have, and not limit the discussion to whether they have separated the role of CEO and Chair.  It would be most helpful for shareholders to see an explanation of whatever leadership structure the company has in place.  At The Corporate Library, we have identified numerous leadership structures among the more than 3,200 North American companies we cover, beyond the more common structures mentioned in the SEC’s proposed rules.  For example, I have been conducting a study of over 100 US companies that have an Executive Chair of the Board (i.e., a board chair who is not CEO but who is an employee of – and paid a salary by – the company).  Ideally, companies with this structure would explain to shareholders the roles and responsibilities that person is providing the company and why they are paying large salaries – sometimes as much or more than the CEO – to an Executive Chair.  Similarly, explanations for situations where there are other unusual leadership structures, such as Vice Chairs, Co-Chairs, an “Office of the President,” etc. would be helpful.

A positive change that we would see if these rules are adopted is more meaningful information about the roles and responsibilities of the lead independent director. However, companies should also have to disclose their reasoning if they have combined the roles of CEO and Chair of the Board and NOT created the position of lead independent director (or a similar position).  Surprisingly, there are many US companies which fall into this category.

If companies comply with the spirit of the new disclosure rules, shareholders should be given insight into the process by which the board decides upon the best leadership structure.  Ideally, when making this decision, the board will take into consideration issues such as the following: the person currently filling both roles;  the presence of a lead independent director and the person currently in that role; the current composition and effectiveness of the entire board and other governance structures currently in place; the compensation practices currently being used to motivate corporate leaders; the company-wide leadership succession plan; the competitive and economic situations facing the company, etc.  We can hope that all boards already have such a process in place, and discuss the issue as a standing agenda item on their annual board calendar.

However, it is not only important to determine the best structure for the company and the board “at the time of filing,” as the SEC requests.  Boards should also acknowledge that this structure may not always be appropriate.  The board’s decision would not be complete until they also discussed and decided upon the changes that would lead to the need to reassess the leadership structure.

Along those lines, the SEC should consider requiring companies to disclose whether or not there is a succession plan in place for board and company leadership.  I understand that companies will not disclose the details of succession plans, but telling shareholders that one is in place and describing the role the board plays in creating, reviewing and updating the plan should be given consideration.

In the rule proposal, the SEC is careful to point out that they are not taking a stand on which leadership structure is preferred, stating that “… we note that different leadership structures may be suitable for different companies depending on factors such as the size of a company, the nature of a company’s business, or internal control considerations, among other things.” However, we do hope that, if approved, the requirements for more disclosure will ensure that all boards are having meaningful discussions and debates about the appropriate leadership structure for their companies, both currently and in the future.

Annalisa Barrett — Senior Research Associate