The Advisors' Blog

Last week, the SEC held a meeting of its Investor Advisory Committee – and one of the topics covered was market perspectives on non-GAAP financial disclosures. Jeff Mahoney – who is General Counsel at the Council of Institutional Investors – participated in that panel discussion. Although it has been a few years since CII submitted its rulemaking petition and follow-up letter on this topic, Jeff gave a strong reminder that transparency of non-GAAP measures in the context of executive compensation disclosures remains a priority for CII and its members. In fact, it’s one of the three main advocacy priorities that CII has identified for 2025. Here’s how CII describes the issue:

While there may be reasonable reasons for companies to use non-GAAP financial measures in executive compensation programs, there is the potential for boards to misuse them in a manner that may reward executives despite poor performance. Due to a loophole that permits companies not to reconcile non-GAAP target measures used for executive compensation with GAAP, investors are not always able to monitor the appropriateness of exclusions and other adjustments to GAAP being incorporated into executive compensation decisions.

Importantly, this loophole applies only to the Compensation, Discussion & Analysis (CD&A) section of the proxy statement. For over two decades, the SEC has generally required companies to give equal prominence to GAAP and non-GAAP financial measures as well as provide a quantitative reconciliation of the numbers in most financial filings. The solution is straightforward: The SEC should require that the CD&A include an explanation of why non-GAAP measures are better for determining executive pay than GAAP, and provide a quantitative reconciliation (or a hyperlink to reconciliation in another SEC filing) of these two sets of numbers.

Remember that ISS also encourages transparency around non-GAAP adjustments that affect compensation, as discussed in FAQ No. 41 and my blog from last year.

– Liz Dunshee