SEC Helps Investors Weigh Governance and Risks in 2010

December 30th, 2009

It took a financial crisis to teach regulators the value of intangibles seldom found in financial statements. But 2010 marks the start of a new decade, and investors can take comfort in the way the SEC is stepping up to the challenges with new proxy disclosure requirements that shine a brighter spotlight on governance practices and the role of directors in overseeing risks. This information has grown especially critical after investors suffered unexpected losses and faulted poorly-disclosed compensation practices and ineffective systems of risk management.

The SEC’s new reporting requirements take effect on February 28, 2010. Below are highlights of the newly required information and the expected benefits for investors:

  • Qualifications of directors and nominees. 2010 proxy statements will contain more complete descriptions of the experience, qualifications, attributes and skills of directors and nominees. This should help investors assess whether a particular nominee is an appropriate choice for a particular company.
  • Consideration of diversity in board nominations. Investors will also find a discussion of the factors taken into consideration by the nominating committee when evaluating the composition of the board taken as a group. Some companies may seek a mix of directors with different professional experience, education, and skills; others may seek a mix of races, genders and national origins. Whatever the factors involved, boards with diversity policies must explain how their company’s policy is implemented and how they evaluate its effectiveness.
  • Board leadership structure and role in risk oversight. The SEC is requiring companies to describe their leadership structures and their reasons for selecting these structures, as well as the role of the board of directors in the oversight of different kinds of risks, including credit, liquidity, and operational risks. This information should help investors evaluate whether the board is exercising appropriate oversight of risks and whether the company’s risk profile is consistent with their investment goals.
  • Compensation policies and their effect on risk-taking. Larger public companies will need to discuss their compensation policies and practices for all employees, if these policies or practices create risks that are reasonably likely to have a material adverse effect on the company. Despite the subjectivity involved in making these disclosures, the end result is likely to help investors by focusing their attention on any incentive structures that may be inconsistent with their investment goals.

The SEC’s desire to have these reporting requirements effective for the 2010 proxy season leaves companies little time to adjust their processes and controls. But, if properly implemented, the SEC’s new disclosures should provide investors with more solid information on which to base their voting decisions and a more solid footing on which to base their investment decisions.

For more information, see our special report on Changes in Proxy Rules: Will They Help or Hurt?

Entry Filed under: Governance

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