In July 2009 the SEC proposed new rules intending to improve corporate disclosures regarding risk, compensation and corporate governance matters, and after receiving comments on the proposals, the SEC issued final rules on December 16, 2009.  Effective February 28, 2010 companies are now required to implement these new disclosures in proxy and information statements, annual reports and registration statements.  These disclosures are designed to better enable shareholders to evaluate the leadership of public companies and increase corporate accountability by increasing transparency in the following areas:

  • Risk – by requiring disclosure of the board’s role in risk oversight and compensation risks;
  • Governance and Director Qualifications – by requiring more disclosure about director background and qualifications, and
  • Compensation – by revising the reporting of stock and option awards and disclosing potential conflicts of interest of compensation consultants.

This summary focuses on three of the proposed amendments that relate to risk management, the comments received on them and the final ruling from the SEC

Amendments To Disclosure Rules

Enhanced Compensation Disclosure

The July 2009 proposal for this amendment required an expansion of the Compensation Discussion and Analysis requirements to include how the company’s overall compensation policies, including non-executive employees, could create incentives that may affect the company’s risk and how that risk was being managed.  The reasoning was that this disclosure would help investors identify whether a set of incentives had been created that might lead to excessive or inappropriate risk taking by employees. 

Comments were mixed and while some agreed the information would be beneficial to shareholders, some expressed concern that the linkage between risk-taking and compensation policies is not well understood yet by both management and investors.  Others argued that it was not appropriate to expand the disclosure information past executive employees because this would create lengthy and complex CD&A statements. 

The final ruling requires companies to address the compensation policies for all employees if those policies and practices create risks that are reasonably likely to have a material adverse effect on the company as a whole.  This disclosure requirement is similar to the MD&A requirement since it is a risk-oriented disclosure with a “reasonably likely” threshold.  With this focus, the amendment is intended to have the disclosures describe compensation incentives that would be most relevant to investors.  The final rule contains a list of example situations where compensation programs may cause unintended material risks to companies.  Some of examples that could trigger discussion include compensation policies and practices:

  • At the business unit of the company that carries a significant portion of the company’s risk profile;
  • At a business unit that is significantly more profitable than others within the company; and
  • At a business unit where the compensation expense is a significant percentage of the unit’s revenues.

If companies determine that disclosure is required, illustrative examples of issues appropriate for companies to address are also included in the final ruling.  These include the company’s risk assessment or incentive consideration in structuring its compensation policies and practices or in awarding and paying compensation.  The final rule does not require a company to make an affirmative statement asserting that compensation policies do not have a materially adverse effect on the company.

Enhanced Director and Nominee Disclosure

The July 2009 proposed amendments required companies to disclose for each director and any nominee for director the experience, qualifications, attributes and skills that makes the person qualified to serve as director of the company.  The proposal would have also required disclosure of a director’s or director candidate’s risk management experience.  Commentators asserted that the disclosure of such detailed information was not meaningful since boards are intended to consist of diverse individuals and such information may increase liability. 

After considering the comments, the final rule requires disclosure for each director and any nominee for director the particular experience, qualifications, attributes or skills that led the board to conclude that the person should serve as director.  This disclosure is required annually for all nominees and for all directors and does not specify the particular information that should be disclosed, providing flexibility for companies in determining the information about a director’s skills that should be disclosed to investors.  The reference to “risk assessment skills” in the proposal amendment was deleted in the final rule.

New Disclosure about Board Leadership Structure and the Board’s Role in Risk Oversight

Under the proposed amendments companies would have first been required to disclose their leadership structure and why it is appropriate for the company.  Additionally, there would be disclosure in proxy and information statements required about the board’s role in the company’s risk management process. 

Comments were mostly supportive that the information would be useful to investors and improve investor understanding of the role of the board in a company’s risk management practices.  Others argued that the amendments were too vague or that the disclosure of the board’s role in risk management would be more appropriate as part of the discussion of a company’s risk management processes.

Under the final amendment, companies are required to disclose whether and why it has chosen to combine or separate the principal executive officer and board chairman positions and why this board leadership structure is the most appropriate for the company.  Also, disclosure about the board’s involvement in the oversight of the risk management process will provide important information to investors about how material risks are being managed and communicated among management.  There is flexibility for companies to describe how the board administers its risk oversight function and how it receives its information from the individuals who supervise the day-to-day management responsibilities. 

The other amendments now required by the SEC include:

  • Reporting of the aggregate grant date fair value of stock awards and option awards granted in the fiscal year to be computed in accordance with FASB Accounting Standards Codification Topic 718;
  • Additional disclosure of any directorships held by each director and nominee at any time during the past five years;
  • New disclosure regarding the consideration of diversity in the process by which candidates for director are considered for nomination;
  • Additional disclosure of other legal actions involving a company’s executive officers, directors, and nominees from the past ten years;
  • New disclosure about the fees paid to compensation consultants and their affiliates under certain circumstances; and
  • Disclosure of the vote results from a meeting of shareholders on Form 8-K generally within four business days of the meeting.

Click below to download entire SEC rule.

Link: U.S. Securities and Exchange Commission website:

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ERM Enterprise Risk Management Initiative 2009-12-16