Publications: Articles Authored by Julius J. Brecht

Is a proxy statement change in your future?
By Julius J. Brecht [1]
For The Alaska Journal of Commerce

Those of you who have investments in companies subject to the reporting requirements of federal securities law may have noticed a different appearance and content to proxy statements received this proxy season.

These companies are ones whose securities are registered under the Securities Exchange Act of 1934 and traded on a stock exchange. These exchanges include the New York Stock Exchange and the Nasdaq Stock Market.

Late last year, the Securities and Exchange Commission adopted comprehensive amendments to federal disclosure rules addressing executive and director compensation, related person transactions, director independence and other related corporate governance matters. These rules have an impact on various reports required under federal securities law.

In particular, they apply to an annual report, a portion of which often ends up in a company's management proxy statement used in soliciting votes for shareholder meetings. The new rules apply for fiscal years ending on or after December 15, 2006. That is, they apply starting with the present proxy season.

The compensation rules were last revised approximately 15 years ago. The new rules reflect a significant shift in the focus of required disclosure. They mandate disclosure of all forms of compensation in a presentation structure that allows greater comparability, from person to person, year to year and company to company.

The new rules are principle-based, rather than the previous recipe approach. The new disclosure requirements in them must be addressed based upon their stated objectives. One clear new objective is that all compensation must be disclosed.

The disclosure must be in terms of what the SEC characterizes as "plain English." The disclosure must be in terms easily understood. It must eschew jargon and unnecessary legalistic terminology in describing compensation as well as other provisions of the new rules. In short, plain English assures orderly, clear presentation of possibly complex information so that investors can best understand its meaning.

The new rules are intended to provide investors with a clearer, more understandable picture of compensation earned by a company's principal executive officer, principal financial officer and the three otherwise highest paid executive officers at the end of the last completed fiscal year. These five individuals are referred to in the rules as the company's "named executive officers."

The new rules also focus on similar disclosure regarding individuals on a company's board of directors. In addition, the new rules are intended to provide better information about key financial relationships among a company and its executive officers, directors and significant shareholders and their respective immediate family members.

The new rules are in response to what the SEC has observed as too many cases of disclosure in the past that did not inform investors adequately as to all elements of compensation. It had become obtuse.

A significant element of the new rules is a new compensation discussion and analysis requirement. This new section requires in narrative form an overview of a company's material elements of compensation objectives and policy.

The new disclosure focus is on the objective of a company's compensation program. It must include decisions on elements of the program made affecting compensation during the previous fiscal year for the named executive officers and directors.

The rules prior to these amendments addressed compensation issues through a report of a compensation committee. In contrast, the new rules emphasize analysis and description of the nature of compensation.

The new rules retain the structural approach to disclosure which includes prescribed, highly formatted tables. However, rather than rely solely upon lengthy or inadequate footnotes to those tables, the new rules require enhanced narrative disclosure where necessary to provide the investor a clear and complete statement of executive compensation.

The tables are designed to provide comprehensive and focused quantitative presentations. Total compensation must be disclosed in a summary compensation table. In the past, equity compensation was expressed as a number of shares and exercise price. Now the disclosure must, in addition, include valuation and inclusion in the requisite tables.

The new rules build upon highly formatted tables in an attempt to promote comparability. They also require greater focus not only on total compensation but also equity-related and incentive compensation, unexercised or unvested equity-related awards and retirement, and deferred compensation benefits.

Perquisite requirements are clarified under the new rules. However, the emphasis is on the principle that all compensation must be disclosed.

Another significant feature of the new rules focuses on disclosure of retirement, deferred compensation and post-termination benefits for named executive officers. Here, the new rules substantially enhance disclosure, including quantitative disclosure, of the forms of compensation.

The new rules require more fully disclosed director compensation. This requirement is prescribed by a specified tabular format.

Like the changes to executive compensation, the new rules for related person transactions provide for significant revision to the requisite disclosure to make it more principles-based. The new rules require companies to track more transactions and to make more judgments as to materiality than under the prior rules. The new rules require a company to disclose policies for review, approval or ratification of these types of transactions.

On their face, the new rules may not appear to change significantly the reporting disclosures for publicly traded companies. However, a careful comparison of proxy statements prepared under the prior rules with those prepared under the new rules shows substantial enhancement of the scope and depth of analysis and disclosure of areas covered by the new rules.

Publicly traded companies must reexamine and significantly change disclosure controls and procedures to ensure that they capture necessary data for disclosure and reporting as required under the new rules. All levels of management of a company will thus be required.

The new rules apply to not only executive officers and the board, but also to the company's compensation, corporate governance and audit committees. They also apply to the company's human resources, accounting and legal staff.

After completing the first year under the new rules, a company may find preparation of future disclosures under them less time consuming. At the same time, investors can come to expect a greater transparency of disclosure in those areas covered by the new rules and better understand and analyze their investments.

[1] Mr. Brecht is an attorney in private practice and shareholder with the law firm of Wohlforth, Brecht, Cartledge & Brooking, A Professional Corporation, with offices in Anchorage, Alaska. Mr. Brecht's concentration of practice is in state and federal securities law and corporate and finance law. The content of this article was not prepared as, and must not be construed as, legal or investment advice to anyone. He may be reached at .

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