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AGENDA
Airing
of SEC Comment Letters Provokes Board Fears
Article published on
Oct 15, 2007
By
Kristin Gribben
Editor's Note: The
following article is part of
Agenda's
special issue devoted to executive compensation.
As if the new
SEC comp
disclosure rule weren’t enough for boards this year, the commission plans to
make publicly available the comment letters it mailed to 350 large companies
and the companies’ responses.
For directors, the SEC website postings are uncharted territory given the
lack of precedent for the government's publishing correspondence with
companies over executive pay.
Companies fear investors could use the additional compensation information
against them. This could take the form of a shareholder lawsuit or a
campaign to withhold votes against compensation committee members’
reelection to the board.
Such a letter’s mere
presence on the Internet is a problem. It confirms that a company is one of
350 the SEC critiqued for lapses in their first compensation disclosure
filings.
“Odds are high that
shareholders, as the guise for the money grubbing plaintiffs' bar, will use
any cannon fodder they can find in such letters to leverage settlement
concessions out of the corporate community in securities-related class
action litigation,” writes
Computer Sciences
General Counsel Dan Fisk
in an e-mail to
Agenda. “We spent a huge amount of time and money complying with the
new [disclosure] requirements and do not relish having more to address in
that regard should we receive further inquiries.”
The SEC will make the
letters public 45 days after all correspondence ends. Many companies have
still not replied to the SEC’s request for more information despite a
deadline date of Sept. 21.
However, recourse is
available for boards concerned that the letters will divulge corporate
secrets. Under SEC Rule 83, companies that say their responses should remain
confidential can request that the correspondence stay out of the public
domain. The commission disclosed this information in the compensation
disclosure guidance released last week.
The privacy rule requires a company to submit a written request for
confidential treatment at the time it provides the information to the SEC.
The request goes to the SEC’s FOIA/Privacy Act Office for review. The
company then must provide FOIA with a compelling reason for anonymity. A
common reason is competitive harm.
While the commission has regularly inquired about company documents like the
10-K, it has never asked so many questions before on executive compensation.
The commission still doesn’t know how many companies will request
confidentiality at this point. SEC spokesman John Nester
says it would be “apples to oranges” to compare the amount of
companies that keep their responses to 10-K filing inquiries confidential.
He declined to provide numbers for response letters to 10-Ks that are kept
private.
The SEC says all the hype about the comment letters is much ado about
nothing. “We at the staff have been somewhat surprised by the tension from
the letters. We are not exactly sure what happened,”
John White, head
of the Division of Corporation Finance, said at a recent
Practising Law
Institute conference. White also noted that 14,000 SEC comment
letters, related to other corporate financial matters, are already on the
SEC’s website, making this current endeavor no big deal.
In the comment letters, the commission asked companies for more details on
their performance targets. This could be the most sensitive area for most
companies when deciding whether to request confidentiality.
Performance targets could be confusing to investors because sometimes
executive compensation program goals differ from the targets companies
release to Wall Street, says
Michael Cahn, a
former general counsel and now consultant at
Textron. “But
the SEC is doing what they said they would do and asking companies to back
that up if they can’t disclose” performance targets in the proxy statement
for competitive reasons, he says.
Tim Smith, vice
president of Walden
Asset Management, says he will look at the responses to gain more
information about the companies’ Compensation Discussion & Analysis but
won’t be reading them with the intent of using the information against the
companies.
“We’re not going to be mean-spirited about it,” he says. Smith says he
understands some companies’ CD&As are subpar since it’s the first year the
new rules have been in effect.
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