Preparing the 2010 Proxy Statement

February 1, 2010

On December 16, 2009, the Securities and Exchange Commission adopted a number of amendments to its proxy disclosure rules that will be effective for the 2010 proxy season.[1] The new rules will significantly affect the preparation of, and disclosure in, proxy statements.[2]

The new rules address the valuation and reporting of equity awards in the compensation tables, risks arising from compensation practices, use of compensation consultants, and corporate governance matters, including board leadership structure, board diversity, the board’s role in risk management, and the specific skills of each director and nominee for director. They also require disclosure of shareholder voting results within four business days on Form 8-K, rather than in the next Form 10-Q or 10-K.[3]

The staff of the SEC's Division of Corporation Finance issued additional guidance regarding the new rules on January 20, 2010, in the form of Compliance and Disclosure Interpretations (CDIs).[4] This memo has been updated to reflect that guidance.   

1. Changing How Stock and Option Awards Are Recorded in the Compensation Tables

The new rules require that the aggregate grant date fair value of equity-based awards granted during the fiscal year be recorded in the Summary Compensation Table and Director Compensation Table.[5] Previously, these tables showed the dollar amount recognized for financial statement purposes for the fiscal year with respect to all awards. The SEC stated that reporting the aggregate grant date fair value of awards better reflects the board’s compensation decisions and that it is more meaningful to shareholders if the board’s compensation decisions for the given year cause the NEOs to change as a result of those decisions. 

2. Compensation Risk Management and Risk-Taking

The new rules require companies to discuss their compensation policies and practices for compensating and incentivizing their employees (not just executive officers).[11] This disclosure is required only if the company determines that the risks arising from its compensation policies and practices “are reasonably likely to have a material adverse effect on the company” (which standard is similar to the MD&A disclosure standard).[12] The SEC has noted that many companies may not be required to make any disclosures in response to this new requirement.

The SEC has provided examples of situations that could necessitate disclosure, such as compensation policies and practices:

3. Director and Nominee Disclosure

Individual Qualifications. The new rules require companies to disclose, for each director and nominee, the particular experience, qualifications, attributes, or skills that led the board to conclude that such person should serve as a director of the company.[14]

Past and Current Directorships; Legal Proceedings. The new rules also:

4. Diversity in Identifying Nominees for Director

The new rules require companies to discuss whether, and if so how, the nominating committee (or full board) considers diversity in selecting candidates for nomination as directors. In addition, if the company has a policy regarding the consideration of diversity in selecting board nominees, the company must discuss how the policy is implemented and how the board assesses the policy’s effectiveness.

The new rules do not, however, define “diversity” or “policy.” With respect to diversity, the SEC recognizes that companies define diversity in various ways, reflecting different perspectives. Some companies may conceptualize diversity expansively to include differences of viewpoint, professional experience, education, skill, and other individual qualities and attributes, while other companies may focus on diversity concepts such as race, gender and national origin. As a result:

5. Disclosure About Board Leadership Structure and the Board’s Role in Risk Oversight

Leadership Structure. The new rules require companies to disclose:

Risk Oversight. Companies must also now disclose information about the board’s role in risk oversight. The SEC has stated that this disclosure is intended to provide information about how a company perceives the role of its board and the relationship between the board and senior management in managing the material risks facing the company. Rather than discussing the particular risk decisions or deliberations of the board, the disclosure should focus on:

6. Compensation Consultant Disclosure

The new rules require enhanced compensation consultant fee disclosure where:

Where enhanced disclosure is required, a company must disclose:

Where enhanced disclosure is not required, the new rules permit, but do not require, an affirmative statement to that effect.

*           *           *           *           *

If you have any questions on these matters, please do not hesitate to contact Alan K. MacDonald, Luke J. Frutkin, or any member of the Firm’s Corporate Governance or Public Companies and Securities Practice Groups. 


[1] Effective Date. The new rules apply to companies that have a fiscal year ending on or after December 20, 2009 that file a Form 10-K or proxy statement on or after February 28, 2010. For detailed information about effective dates, see the Compliance and Disclosure Interpretations referenced in note 4, below.

[2] The text of the final rules is available at

[3] See new Item 5.07 to Form 8-K. 

[4] The SEC issued additional guidance regarding compliance with the new rules in the form of Compliance and Disclosure Interpretations released on December 22, 2009 and January 20, 2010, available here and here, respectively. 

[5] Aggregate grant date fair value is computed in accordance with FASB ASC Topic 718 (formerly known as FAS 123R).

[6] Id.

[7] Id.

[8] A smaller reporting company is required to provide disclosure only for the two most recent fiscal years (e.g., 2009 and 2008).

[9] If a person who will be an NEO in this year’s proxy statement was also an NEO in 2007 (but not in 2008), then all three years must be presented for that person in this year’s proxy statement. A smaller reporting company in that situation would need to provide disclosure only for 2009.

[10] In such a case, companies should consider including compensation disclosure for the omitted executive officer(s) to supplement the required disclosures, particularly where the omitted officer(s) will likely appear as NEOs again in the following year. 

[11] See Item 402(s) of Regulation S-K. Item 402(s) does not apply to smaller reporting companies that provide the scaled disclosures specified in Items 402(m) through (r) of Regulation S-K.

[12] Determining whether disclosure is required is a two-part process:  (1) identify the risks created by the company’s compensation policies and practices (such as, for example, performance metrics, employee incentives, and form of compensation), and (2) evaluate whether those risks are “reasonably likely to have a material adverse effect on the company.”

[13] The SEC has provided examples of the issues that the company may need to address where the company determines that disclosure is required. See Item 402(s) of Regulation S-K and the final rule release cited in footnote 1, above. 

[14] See Item 401(e)(1) of Regulation S-K. 

[15] In the January CDIs, the staff stated that for each director who is not up for reelection, the evaluation of such director’s particular and specific experience, qualifications, attributes, or skills and the conclusion as to why the director should continue serving on the board, should be as of the time that the filing containing the disclosure is made.

[16] In addition, the enhanced disclosure requirement generally does not apply to a consultant that is engaged solely to provide consulting on broad-based plans that do not discriminate in favor of executive officers or directors and that are generally available to salaried employees or to a consultant whose only role is limited to providing non-customized survey information.