Speech by SEC Commissioner:
Remarks at the SEC Open Meeting
Commissioner Roel C. Campos
U.S. Securities and Exchange Commission
July 26, 2006
At the outset, I would also like to add my congratulations and thanks to all of those who have worked so hard to make these proposed rules a reality. In particular, I congratulate Chairman Cox for pressing this rulemaking and making it a priority. I also congratulate John White and his staff in Division of Corporation Finance.
These new and revised disclosure rules are wide-ranging and comprehensive, as they should be. Requiring clear, extensive and precise disclosure of material information forms the backbone of what the Commission does, and this is especially true in the case of executive compensation, where disclosure has often not been as comprehensive as many investors would have liked. I don't have nearly enough time to comment on all aspects of the new requirements that I find so appealing much to everyone's relief, I'm sure but I do want to mention a few that I think are especially important.
First, in my remarks here when we first voted on these proposals, I expressed my strong support for the "total" compensation figure, which includes the grant date fair value of options and stock issued to named executive officers. Needless to say, I remain convinced that this is an especially important part of our new disclosure requirements, and I'm happy to see that it remains a part of our new rules, substantially as proposed.
Second, I'm pleased to see that the Compensation Discussion and Analysis remains a part of the final rules, and further, that the CD&A is considered to be "filed" with the Commission and not merely "furnished." This means that, generally speaking, the CD&A will be subject to the CEO and CFO certifications established by the Sarbanes-Oxley Act, and thus I think issuers will pay much more attention to the CD&A disclosure than they previously did with respect to the Compensation Committee Report. Of course, I remain concerned that companies will still fall into the trap of including only "boilerplate" disclosure in the CD&A (as has happened in the past with the Compensation Committee Report and even the MD&A). As our release makes clear, this is simply not acceptable and I urge companies to take this seriously. As Chairman Cox already mentioned, I would expect that our Division of Corporation Finance will undertake procedures to discourage boilerplate. The CD&A is one part of the new rules that is significantly different than current requirements, and I think that investors will be well served if they receive well thought out and comprehensive narrative disclosure.
Third, I think the new rules do a good job of capturing equity compensation in the form of restricted stock and options. Right now, I'm not referring to timing and backdating I'll turn to that in a moment but rather the tabular and narrative disclosures that detail all aspects of stock option grants, including: (1) their grant date fair value, which is a new requirement; (2) the number of shares of stock and options received in the last fiscal year; (3) estimated future payouts for equity incentive plan awards; (4) the total number of vested and unvested options held by executives; (5) the market value of restricted stock; and (6) the value realized when options are exercised and restricted stock vests. The bottom line is that equity compensation is a very important part of executive compensation, and investors must be given the data to truly understand the magnitude of this compensation.
Fourth, companies and investors should pay particular attention to the discussion about options disclosure, and specifically, about disclosures relating to the timing of option grants. I would like to underscore that we at the Commission are not expressing a view as to whether companies may or may not have valid reasons to time option grants, but, simply put, if a company wishes to time option grants in coordination with the release of material non-public information, then this must be disclosed. On a related point, there has been tremendous discussion about backdating and timing of stock options, and I want to caution that the guidance and disclosure requirements in this release are forward-looking and do not speak to whether or not such past practices were violations of the federal securities laws. That will depend on the facts and circumstances of a particular case.
Finally, in the context of large holding companies and conglomerates, a concern surfaced that the compensation of employees who have a policy making role at a major subsidiary might not have to be disclosed under our proposals. Accordingly, the release seeks comment about this concern and whether our idea to plug the hole is a good one. It seems to me that compensation disclosure of three additional employees who have a policy making function in the context of a large holding company could be very useful to investors. However, the notice procedures in the release will permit investors and others to tell us if there are better ways to accomplish this goal or whether the goal is important.
Let me change topics slightly now. Having mentioned what I like about what is in the new rules, let me briefly mention what is not in there, namely, an advisory shareholder vote on certain aspects of executive compensation. I know that this wasn't included in our proposed rules, and, consequently, we didn't get a great deal of comment letters on this topic although we did receive a handful of letters mentioning this point. Because this issue has only recently begun to be discussed, and because the agency wanted to issue this executive compensation release well in advance of proxy season, the Commission has had no opportunity to fully consider this issue. Further, I know there are many issues, including whether the benefits outweigh the costs, as to whether an advisory vote could be implemented through our rules. We must listen to all views on this topic. However, I think this is an important idea that may promote transparency, and it deserves to be fully explored in future iterations of our executive compensation rules. Perhaps we will receive more thoughts from commenters about this idea in the future. The United Kingdom and Australia already have an advisory vote requirement on the compensation report, and, as a general proposition, we should pay attention to what works in those countries with sophisticated economies.
I'll conclude by asking one question about the disclosure of performance targets. In the final rules, an instruction to Item 402 of Regulation S-K states that registrants are not required to disclose target levels with respect to specific performance-related factors or other criteria involving confidential trade secrets and commercial or financial information, the disclosure of which would result in competitive harm for the registrant. Although this instruction is phrased in terms that registrants are not required to disclose performance targets if certain conditions are met, I want to emphasize that disclosure is required if these conditions are not met. Namely, if the criteria do not involve confidential trade secrets or commercial or financial information, they must be disclosed. Further, if disclosure of this information would not result in competitive harm, then it must be disclosed. Having pointed this out, let me ask one question: how will the Corp Fin staff ensure that companies are taking this requirement seriously, and what do you propose to do if you determine that companies have improperly withheld disclosure of performance targets that are not confidential or would not result in competitive harm if disclosed?
Thanks very much for that answer, and I do hope you look carefully at proxy statements in this regard. I have nothing further to add, and let me conclude by thanking all of the commenters that have taken the time to write us, and thanks again to our Staff for putting together such an excellent proposal. I'm very pleased to support it.