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ABA Urges SEC Not to Require Filing of Compensation Disclosure & Analysis

The American Bar Association, joining a growing chorus, has urged the SEC not to require the filing of the new proposed Compensation Discussion & Analysis since doing so could lead to executive officer involvement in the compensation process and run counter to sound corporate governance. In a comment letter on the SEC's executive compensation disclosure proposal, the ABA's Federal Regulation of Securities Committee said that the CD&A should be a furnished report of the board compensation committee and the rules should specifically reaffirm that the report is not required to address subjective individual performance assessments for named executive officers other than the principal executive officer.

The ABA, while acknowledging that the current disclosure requirements for the compensation committee report do not address much of the information that investors wish to know about the processes and bases for setting executive compensation, does not believe that this is a consequence of the report's status as either a filed report by the company or a furnished report by the committee, but instead arises from the extremely abbreviated nature and scope of the disclosure requirements currently set forth in Item 402(k).

The ABA believes there are significant benefits to retaining the status of the discussion on executive compensation as a report of the compensation committee. The ABA said that requiring a company report risks diluting the control of directors over the disclosures, which is at odds with current best practices in corporate governance. 

Further, the proposed change runs counter to the recent corporate governance trend of disengaging executive officers from the decision-making role in determining executive pay. For example, both the NYSE and Nasdaq have adopted rules requiring that the compensation committee alone, or with the board, be responsible for the compensation of executive officers.

If the discussion of executive compensation becomes a report of the company and is required to be certified by the chief executive and chief financial officers, the ABA said those individuals will need greater access to the compensation committee's considerations in order to provide a basis for certifying to the best of their knowledge that the CD&A does not omit to state a material fact.

For example, to discharge their responsibilities attendant to making the required certification, the senior executive officers will have to inquire of the compensation committee about the decisions of the committee with respect to specific decisions affecting their own compensation. At best, this will be an awkward situation, according to the ABA, and at worst, the procedures that these executives establish to satisfy their duty over disclosure controls may impact a compensation committee's process and substantive decisions. The ABA believes that this is an unintentional but inappropriate consequence of the SEC's proposal that runs counter to the corporate governance goal of making directors more directly accountable for executive compensation decisions. 

The ABA does not share the SEC's view that the quality of the compensation committee report disclosures has been, or that the quality of the CD&A will be, negatively impacted by being a furnished report of the committee instead of a filed report by the company. However, if the Commission determines to treat the CD&A as filed, the ABA urges the SEC to expressly exempt the CD&A from being covered by the certification requirement.

The ABA supports the principles-based approach taken in proposed Item 402(b) by enumerating disclosure concepts and providing illustrative examples. However, the ABA believes that the extent to which the CD&A is required to address the actual bases for and factors affecting reported compensation is not stated as clearly as the Commission may intend. While a careful reading of the proposal suggests that the CD&A should include a discussion of the specific factors and criteria upon which the compensation for the last completed fiscal year was based, the proposed rule text does not specifically state that. 

To clarify the intended scope of the CD&A the ABA urged the SEC to specifically require a discussion of the bases for and factors affecting the executives' compensation and not prohibit or discourage discussions of the information disclosed in and accompanying the individual compensation tables. The ABA noted that, as with good MD&A, the CD&A would be more helpful to investors if the rules require it to begin with an overview of compensation policies and the elements of compensation that provides context for the remainder of the discussion. It should focus on material information and not require a discussion of immaterial factors that did not affect compensation policies or payments. It should also identify and discuss the material performance measures, including non-financial performance measures, that the compensation committee used to set compensation, according to the ABA.