Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Wednesday, August 02, 2006

New SEC narrative disclosure rules: will they add to investors’ understanding?

The new rules passed by the Securities and Exchange Commission on the 26th July will oblige companies to reveal a description of the factors that guided their decisions on executive compensation.

Now, in theory that should lead to more and deeper disclosures in the form of the CD and A (Compensation Disclosure and Analysis). The SEC would like to see this being a plain English description, and a principles-based narrative overview that puts into context the compensation disclosure provided elsewhere. The CD&A would explain material elements of the company’s compensation for named executive officers.

According to Chairman Cox, the CD&A provides both an obligation and an opportunity for a company to explain its compensation policies, and should avoid ‘boilerplate’ language. But will it?

Probably not. If corporate executives and the lawyers who advise them try to meet the requirement while saying as little as possible, who can really blame them?
The statements have to be certified by the chief executive and the chief financial officer, so every word likely will face intense scrutiny before it surfaces. Those two executives will be legally liable for the commentary, which doesn't encourage either length or detail. Litigation risk will also discourage companies from going beyond the minimum.

And history isn’t encouraging. Many companies used Regulation FD as an excuse to say less, not more. And the MD&As (Management Discussion and Analysis) produced by many companies have already fallen foul of the SEC, who remain concerned that companies use only boilerplate language.
All of which is disappointing for investors.


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