By James Hamilton, J.D., LL.M.
The SEC seeks better executive compensation disclosure, stated Shelley E. Parratt, deputy director of the SEC's Division of Corporation Finance, not longer disclosures. Ms. Parratt spoke at the at the recent annual Securities Regulation Institute in San Diego, California.
In October 2007, the SEC completed its initial review of the executive compensation and related disclosures of 350 public companies. She said that the divisions's comments on these disclosures largely fell into two broad categories, the manner of presentation and the nature and scope of the companies' CD&A. According to Ms. Parratt, disclosures could be responsive without necessarily being clear, and longer disclosures did not equal better disclosures.
She emphasized that issuers should strive to improve the "how" and "why" discussions in their disclosures. In preparing their disclosures,the deputy director emphasized that it is important to read and understand the disclosure requirements and ensure that the information provided is responsive to the rules.
Ms. Parratt stated that the staff only commented on the disclosure format where it adversely effected the readability of the disclosures. Approximately two-thirds of issuers reviewed included material such as charts, tables and graphs, that were not required by the rules. Ms. Parratt stated that the staff generally found such additional information useful, and in general only commented upon their use if the additional material was confusing. If the alternative materials were presented more prominently than the required disclosures, she stated that the staff would ask the issuer to de-emphasize them so that readers would not confuse the additional information with the required tables.
In terms of CD&A, she said that companies should emphasize how their compensation philosophy resulted in the amounts paid to executives and disclosed in their filings. This is a principles-based approach, she noted, and added that the specific disclosure examples set forth in the adopting release are neither mandatory nor exhaustive. In general, she noted four major areas in which disclosures could be improved.
1) How issuers analyzed information and why their analysis resulted in the compensation they paid;
2) Why there were differences between the treatment of one officer and others. She noted that this can be sensitive, however, because they may implicate potential succession plans or other matters;
3) The use and impact of benchmarks; and
4) The use of performance targets.
Ms. Parratt stated that the disclosures concerning targets generated more comments than any other area. The questions turn on materiality, and these determinations are subject to each company's particular fact situation. Issuers should assess materiality from different perspectives, she advised,including whether the disclosures would have an impact on shareholders' investment decisions and their voting decisions.
The deputy director set forth a "decision tree" for companies to use in deciding whether to disclose information about the use of a particular performance target. The initial question is whether or not the company uses targets. While the discussion obviously ends if the answer is no, the next question is to assess materiality. If the matter is material, the company must then assess whether disclosure would result in real competitive harm. If the answer is no, the matter should be disclosed. If the answer is yes,the company should carefully review the guidance in the instructions to Item 402(b) and consider what it will say to the staff in support of their position.
Issuers should not wait for the staff to comment to do their competitive analysis, she advised, and it is important for companies to provide detail and "connect the dots" between the potential disclosure and actual competitive harm.
The comment process is meant to be a dialogue, Ms. Parratt stated. Comments do not necessarily indicate a rejection of a particular disclosure approach. She said that comments ask companies to re-think, rather than necessarily re-do, their disclosures.