Much is being made of the new rules for the disclosure of executive compensation set to take effect in the US in 2007. Executive pay is just one of the themes that may make next year’s proxy season the most hotly contentious in recent history.
Riding to the rescue is Institutional Shareholder Services (ISS), which has issued a ‘pre-season’ guide to assist companies looking to avoid negative ratings, shareholder resolutions and unpleasant media coverage. Companies would do well to take heed.With other ratings agencies like Moody’s and Standard & Poor’s minimizing or reevaluating the way they account for governance matters in broad corporate ratings, it is likely that the ISS ratings will attract even more attention from shareholders looking for governance benchmarks to help measure the companies in which they invest.
At the top of the list of stormy issues predicted by ISS for 2007 is, unsurprisingly, executive compensation. By the time we start seeing the first proxy statements of the season, the new compensation disclosure rules will be in full swing and the investment community will be waiting with baited breath to see not only the full details of pay packages but also the rationale behind the schemes. The compensation disclosure and analysis (CD&A) will be critical.
Broad pay structures are increasingly important to investors, and the finer details will make good reading, too. What’s interesting is that the reasoning behind how pay levels and incentive schemes are determined will provide a window into the level of oversight the board exercises. ISS has been saying for some time that CEO compensation is a useful indication of overall corporate governance at a company.
Some in the corporate community are concerned that the new CD&A will not achieve its desired goal. An attendee at a recent Corporate Secretary Think Tank raised the prospect that after an initial period of confusion as companies issue CD&As for the first time, these disclosures will just lapse into boilerplate repetition. Many others agree this is a possibility because, as best practice emerges, all companies will simply conform to that standard and all disclosures may begin to look the same. This is certainly a valid concern because it is exactly what is happening with the MD&A.
Shedding shredding
Compensation may be getting most of the headlines at the moment, but another new disclosure rule may end up as the new governance flashpoint. A new revision of the Federal Rules of Civil Procedure takes effect on December 1 and will have a significant impact on document discovery practices.
The new rules are likely to heighten the risks surrounding document retention and deletion policies. They require companies involved in litigation to disclose all relevant electronically stored information during the discovery process.
Exposing retention and discovery systems will likely change safe harbor protections and impact the risks of noncompliance. It will also change the rules for electronic storage of information. Given that it has been widely predicted that 2007 will be a high-water mark for investigations and litigation, this rule, which up to now has received only minimal coverage, will be high on the agenda at listed companies. It will be interesting to see if activist shareholder groups and governance professionals include a corporation’s discovery system as part of their analysis of its governance. Don’t be surprised if a number of proposals regarding this technology find their way onto proxy statements during 2007.
Brendan Sheehan is senior editor of Corporate Secretary.
