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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.