Six months ago, I checked in with Foley & Lardner for a SOX Birthday Party update. Late last month, I returned to the firm for some insights from partner Peter Fetzer regarding Dodd-Frank's impact on 2013 proxy statements and some related trends. Here's what Fetzer shared.
What is the status of some of the key Dodd-Frank rules that affect 2013 proxy statements?
Peter Fetzer: Many of the key Dodd-Frank rules are still in process and will not directly impact 2013 proxy statements. For example, the compensation committee independence standards will not be finalized until after the 2013 annual report and proxy season.
However, one new rule that will impact the 2013 annual report and proxy season stems from the SEC's adoption of the rules related to compensation committee independence, as the SEC also amended Item 407(e)(3) of Regulation S-K. As amended, this Item of Regulation S-K addresses disclosure of compensation consultant conflicts of interest. Disclosure is not required with respect to compensation advisers other than compensation consultants.
Specifically, all companies that are subject to the SEC's proxy rules (including smaller reporting companies) are required to disclose the nature of any conflict of interest arising from the work of any compensation consultant and how that conflict is being addressed. Companies should adopt procedures to gather the above information so that the compensation committee can assess whether a conflict exists and take any desired actions in response to any identified conflicts in a timely manner. In addition, although the compensation committee independence standards will not be finalized until after the 2013 annual report and proxy season, compensation committee independence questions in director questionnaires may be helpful for compensation committee composition planning purposes.
What types of shareholder proposals are likely to get support this year?
Fetzer: I expect to see an increase in the number of proxy access proposals that are submitted by shareholders. In addition, I think it will be more difficult for companies to exclude such proposals from their proxy statements. While some companies were able to successfully exclude proxy access proposals during the 2012 annual report and proxy season, many of the grounds for exclusion are grounds that can be rectified when drafting for the 2013 annual report and proxy season.
While I think the number of proxy access proposals will increase, companies that are performing well, with good corporate governance practices in place, should be in a position to prevent the proposals from gaining significant support. Companies that are at risk of proxy access proposals gaining majority support are underperforming companies that are under scrutiny for poor corporate governance practices. For example, the first win for a proxy access proposal came at Nabors Industries, which had produced poor shareholder returns and had come under significant scrutiny for its executive compensation practices.
Are any notable effective, leading or even "best" practices regarding Say-on-Pay emerging?
Fetzer: Say-on-Pay issues differ from company to company, but there are steps that all companies should take in preparation for the 2013 annual report and proxy season. Companies should identify all disfavored pay practices. This will allow companies to modify or eliminate any such practices that are deemed no longer appropriate or for which the benefits no longer outweigh the costs, or to prepare a thorough explanation in the compensation discussion and analysis (CD&A) in the proxy statement as to why the pay practice is appropriate.
Companies should also proactively communicate with shareholders and, as appropriate, proxy advisory firms regarding their executive compensation practices. In this regard, the CD&A and the supporting statement for the Say-on-Pay proposal in the proxy statement are perhaps the most important communications in connection with Say-on-Pay. Both the CD&A and the supporting statement should clearly depict how the company's pay arrangements encourage and reward performance, using graphics or charts wherever feasible, and highlight both the favored pay practices that the company maintains and disfavored pay practices in which the company does not.
If you were a CFO, CRO or CCO, what are the top issues you would be monitoring?
Fetzer: It will be important to maintain a focus on compliance and risk management, particularly in light of the current SEC enforcement environment. In recent presentations, SEC staff members have focused on compliance and risk management, and the important role that senior management plays. Senior management is responsible for driving a culture of compliance and ethics and ensuring effective implementation of enterprise risk management.
Failure to maintain an effective compliance and risk management program may subject a company to enforcement actions. In this regard, SEC staff members have stressed that a company's failure to comply with rules and regulations, even absent harm to clients, is sufficient for the SEC to bring an enforcement action. Further, the SEC's new whistleblower rules have incentivized employees to report wrongdoing to the regulators. So, companies should reassess the adequacy of current compliance and reporting systems, create a working environment in which employees are inclined to first report issues internally, and investigate complaints quickly in order to determine whether self-reporting to the government is appropriate.