For those of you on boards of directors or supporting them, you’ll want to focus on new governance-related regulations recently issued by the SEC. Originally proposed for comment last summer, these rules take effect February 28, 2010, in time for many companies’ upcoming 10-K and proxy season.
Risk. A particular focus of the new requirements is the board’s role in overseeing risk, focusing on such matters as how the board administers its oversight function – for instance whether through the entire board, a separate risk committee, or the audit committee. Also, discussion of the company’s compensation policies or practices as they relate to risk management and risk-taking incentives that can affect the company’s risk and risk management. The release suggests also that companies may want to disclose how the board receives information from individuals with day-to-day management responsibilities.
Director Qualifications and Experience. Existing disclosure requirements are expanded to include, for each director and nominee, information leading to the board’s conclusion that the person should serve as a director of the company, focusing on such matters as the individual’s experience, qualifications, attributes, and skills.
Compensation. The rules call for revised reporting of stock and option awards in the summary compensation table and director compensation table, and disclosure of certain potential conflicts of interest of compensation consultants. Rather than reporting the dollar amount recognized for financial statement purposes for the fiscal year, the rules require reporting the aggregate grant date fair value of stock and option awards granted in the fiscal year, with special instructions for awards subject to performance conditions.
Board Leadership Structure. Disclosure is required about the board’s leadership structure, including why it is deemed best for the company and why it was decided to combine or separate the CEO and board chair positions. Also, where they’re combined, disclosure about whether a lead independent director is in place and its leadership role.
Other required disclosures relate to such matters as: Other board seats held by directors and nominees; how diversity is considered in identifying director candidates; and legal actions involving a company’s executive officers, directors, and director nominees.
There’s a lot here, and boards, corporate secretaries, governance officers and others who support the board’s activities will need to understand the new rules and effect compliance. For certain matters, such as requirements regarding risk, we can expect some companies to reconsider their risk management activities to ensure their substance is in line with desired disclosures.