February 4, 2010
Cone of Silence vs. Gift of Gab
– Laura Thatcher, Alston & Bird
In talking with clients this year about the new compensation risk assessment in the proxy disclosure rules (S-K Item 402(s)), I have encountered about an even split between (A) those who intend to take the SEC up on its offer to “be silent” if the conclusion is that the company-wide compensation program is not “reasonably likely to have a material adverse effect on the company” and (B) those who, reaching the same conclusion, intend to disclose in general terms the process that was followed and features of the program that led to that conclusion.
Very few have opted to simply state the “all clear” conclusion without elaboration, which could give you all of the potential exposure (for being second-guessed by the plaintiff’s bar if something later goes seriously south) and none of the advantage of having a good story to tell.
Gearing up for 2011 and widely-expected mandatory say-on-pay, it makes good sense to start thinking now about how the CD&A and related compensation disclosures can best be stated to enlighten shareholders and not just technically comply with the disclosure rules. A clear and frank discussion of the risk assessment process can give comfort to shareholders on a number of fronts.
First, they will know that the company did not just overlook the new disclosure requirement. Second, they will see first hand how rigorous the review was and how it was conducted. Third, this is yet another opportunity for the company to extol its positive efforts to manage and control compensation-related risks, such as having an effective recoupment policy, long-term stock retention guidelines and an appropriate balance of compensation elements. In telling the “good story,” don’t let it be lost in a boilerplate recitation of the positive features of the program or the steps of the review. An individualized, thoughtful discussion goes a long way to assuring shareholders that the company is serious about assessing and controlling risk.
While the say-on-pay vote is likely to be limited to the compensation of NEOs, the wider compensation program should be of interest to shareholders and may influence their views.