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Beller, White Discuss New CD&A Requirement
With the new executive compensation disclosure rules in
place, Corporation Finance Director John White believes the industry will see a
sea change in the quality of disclosure in the 2007 proxy season. The heart of
the new rules is the compensation disclosure and analysis section, he said, and
he urged companies to try to make a difference in their first attempts at
CD&A disclosure in the coming year. Mr. White spoke at the Practising Law
Institute's conference on executive compensation. Companies should avoid just
repeating numbers from the financial statements, he said. CD&A should
provide context and perspective on a company's compensation package, and explain
the reasoning behind the numbers in the compensation tables.
Former Corporation Finance Director Alan Beller said that
companies should pay particular attention to the analysis piece of CD&A.
Over the years with MD&A the SEC staff has expressed the most
dissatisfaction with the analysis portion, he noted.
CD&A should discuss why compensation went up or down,
Mr. Beller said, and should explain it the context of the company's entire
compensation package. He also hopes for a significant change in the quality of
disclosure, but said that it may take several years, and periodic feedback from
the Commission staff, for companies to get comfortable with the new disclosure.
Both men emphasized that companies should not get
"hung up" on the six core questions included in CD&A. If the
questions do not apply, Mr. Beller noted, then companies should not worry about
them. Mr. White agreed, adding that those preparing the CD&A must determine
what information is material and must write the disclosure to fit a company's
particular circumstances.
When preparing the CD&A, Mr. Beller recommends that
companies not start with the six core questions. Instead, they should consider
what they are trying to accomplish with their compensation package for the CEO
and other named executives. The six core questions will be answered along the
way, he said.
While MD&A expresses management's point of view, Mr.
Beller believes CD&A should provide the compensation committee's viewpoint
since it is responsible for compensation decisions. The committee will need to
be involved with CD&A early in the process, he said, because its view has to
be accurately represented. He cautioned companies to remember that CD&A
should be a discussion of the outcomes of the compensation committee's process,
not of the process itself.
Mr. Beller said that it has been his experience that
management pays close attention to executive compensation and pushes back more
than it does in any other area. He said he has had an easier time convincing
management to disclose a large financial element of MD&A than to disclose
information about perquisites.
In this regard, he believes the principles-based approach
to the new disclosure is good for corporate counsel. It is often difficult for
counsel to stand up to management in the area of compensation, he said, but the
principles-based approach is a potent weapon. If management asks to see a
particular disclosure requirement, Mr. Beller said that counsel can point out
that while there may be no specific rule, the SEC has said that principles are
important and disclosure should go beyond black letter rules.
Mr. Beller briefly discussed a few specific areas of
interest within CD&A, including the confidentiality of financial targets. He
noted that the Commission received many comments on this issue, and that the
final rules have taken those comments into consideration.
There is now more clarity around the standard for not
disclosing targets, he said, and the standard is similar to that applied to
confidential treatment requests. Mr. White noted that there is still some
disclosure required if a company chooses not to disclose its financial targets.
The company must indicate how difficult or likely it is for its targets to be
achieved.
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