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Retirement Funds Recommend More Disclosure About Option Grants

A group consisting of a dozen U.S. and foreign retirement funds recently supplemented its April 10, 2006 comment letter to the SEC regarding executive compensation to add its views on the back-dating of executive stock option grants. The funds said that the back-dating of options is of great concern, not only because of the accounting and financial reporting implications, but also because it suggests an ineffective board dominated by management. The funds said the back-dating of stock options may also suggest a broader pattern of manipulative practices.

The funds asked the SEC to include in its final rules a requirement to ensure that investors are promptly informed about a company's policies and practices relating to the award of equity interests to executives. The disclosure should include the company's method for selecting grant dates, whether it permits back-dating and whether it considers the release of material information in determining grant dates. The disclosure should also include any differences between the issuance or board approval and the effective date of the awards. The funds said that companies should also disclose whether employees are permitted to select or recommend grant dates.

If timing, back-dating or the consideration of pending material information is permitted, the funds said that companies should disclose whether and how the size of the award was adjusted to reflect the increase in the award's value. Companies should disclose this information on Form 8-K and in the compensation section of the annual proxy, in the funds' view. The funds added that the prevalence of manipulative compensation practices underscores the importance of requiring that the CEO and CFO certify the executive compensation disclosure, and that the compensation committee members sign the new compensation disclosure and analysis section contemplated by the proposed rules.

The funds also referred to a recent study which found that approximately one-fifth of the option grants the authors reviewed were not reported on Form 4 within two business days of the grant as required. The late disclosure appeared to be connected to return patterns that may be linked to the back-dating of the rewards, according to the study. The funds called on the SEC to make compliance with the required two-day filing of Form 4 an enforcement priority. Companies should also disclose in their proxies the reason for any reporting noncompliance and the status of any resulting legal or enforcement actions, the funds wrote. They also urged the SEC to seek the recovery of any improperly awarded option grants.

In a separate letter, the treasurer for the state of Connecticut, who was a signatory of the group letter, urged the SEC to also consider the independence of compensation consultants in connection with its executive compensation proposal. The recent discovery of back-dating abuses is not the only concern with respect to executive pay packages, according to treasurer Denise Napier. She asked the SEC to require the disclosure of whether compensation consultants who are employed by a compensation committee are performing other work for the same company, including the nature of that work and the fee arrangement for those services.