"Building a Future, Honoring Our Past"

The Society's 60th Annual National Conference
at the Loews Philadelphia Hotel
June 28 - July 2, 2006

Pre-Conference: "Ethics Workshop" and "What Makes a Corporate Secretary Marketable" on Wednesday, June 28.

The Conference program includes speakers Frank G. Zarb, Sr., Managing Director and Senior Advisor to Hellman & Friedman LLC, former chairman of Nasdaq and the NASD; and SEC Commissioner Paul Atkins. The Luncheon Speaker will be Michael Beschloss, NBC News' Presidential Historian and best-selling author of The Conquerors.

Topics include: Executive Compensation Disclosure, Crisis Management, The Press's View of Corporate America, Management of the Board and Its Committees, Challenges at Private and Small and Mid-Cap Public Companies, Dealing with Governance Rating Agencies, Managing the Future, and Effective Minute Taking.

Special Feature: Compensation Disclosure Rules - Brian Lane

Geoff Loftus interviewed Brian Lane, partner at Gibson, Dunn & Crutcher L.L.P. and formerly an attorney on the SEC staff, regarding the SEC's proposals on executive compensation disclosure. (The interview was by e-mail.)

Geoff Loftus: What is the most important aspect of the proposed rules?

Brian Lane: It has to be the interpretive guidance on perks. Not only are these interpretations effective this proxy season, but I think some companies are going to be surprised with how broadly the staff is viewing a "perk."

Geoff Loftus: What surprises do you mean?

Brian Lane: The definition of perk excludes only items that have "direct" and an integral relationship to an executive's duties. The staff has said country club memberships are perks if they are used, even once, for personal benefit.

Likewise, they indicated that relocation assistance may be a perk. Couple the definition with the proposed lower threshold of $10,000 and disclosure could change significantly. I am cautiously optimistic that the staff will be reasonable, especially during this season, so there is no need to panic.

Geoff Loftus: The staff indicated that "incremental cost" was the way to value perks. Are there any issues raised with that?

Brian Lane: This is not a new standard. It has been the staff's informal position. Now it is the Commission's position. There are many scenarios that have vexed companies for years. For example, an executive brings along a spouse on a business trip. How do you value? It is easy if the spouse travels on a commercial airline – it is the cost of the ticket. Yet, if the spouse travels on the company jet, there is no incremental cost. That is easy. What about luxury boxes at stadiums? The company has a box with 10 seats and pays $100k per season. An executive brings a daughter to the game. What is the incremental cost to the Company? Is it the value of one seat for one game, or is there no incremental cost because the company pays a flat fee for the seats whether they are used or not? Does it change the analysis if the seat was vacant and the daughter was invited at the last minute? The same problem exists for country club memberships. What if the CEO uses it twice in one year for personal reasons? Is the entire cost of the membership considered a perk, or do you calculate the value of two rounds of golf? These may seem petty issues to the staff, but they are everyday issues for corporate secretaries.

Geoff Loftus: Will the new rules effect pay structure?

Brian Lane: I do not think it will have a dramatic effect. I think companies will review their perk policy and be more cognizant of an executive's total pay package and outstanding options, but no major re-tooling.

Geoff Loftus: It's been suggested that the revised comp table is as much about wealth accumulation as current income. Would you care to comment?

Brian Lane: I have been hearing that reaction too. I don't think that is what the staff intended. When they asked for disclosure about an executive's total option position, for example, I think they felt that it would help put current option grants in perspective. Yet, it is worrisome to some practitioners because it may give the wrong impression about an accumulation of options over many years and not properly reflect the true value of unvested securities.

Geoff Loftus: How is this going to change the minutes of the compensation committee, if at all?

Brian Lane: I do not think practice will change dramatically. I think minutes will continue to be brief, driven more by cautions concerning possible litigation rather than from corporate concerns. The added responsibilities to audit committee members from SOX has not seemed to drastically altered minute taking for audit committee meetings. I would expect the same here.

Geoff Loftus: What is your view on benchmarking?

Brian Lane: It is very common in the compensation area. Companies are going to compare their disclosure practices with those of their peers. In the span of two years, I predict that most every company will move to the same model and approach to disclosure.

Geoff Loftus: How will item 402 disclosures be broken down?

Brian Lane: The item 402 disclosures would be captured in two tables. The first table is a revamped Summary Compensation Table for named executive officers, which under the proposed rules would include the CEO, CFO and the next three most highly compensated executives. In addition, the proposed rules would require a new director compensation table requiring disclosure similar to the summary compensation table for NEOs. Finally, the proposed rules would require disclosure of the compensation of up to three additional individuals who are paid more than the lowest paid NEO. These individuals would not be named, but disclosure of their job description and total compensation would be required.

Geoff Loftus: Does the proposal pick up somebody who happened to sell lots of product in a particular year and earned a lot of money in commissions and ends up being in the table even though he isn't an executive officer at any level of the corporation or its subsidiaries?

Brian Lane: Yes. The proposed rules would require disclosure of up to three additional employees whose compensation exceeds that of any of the named executive officers. So, a key sales employee who in that particular year, makes more money than a named executive officer may get picked up under the disclosed rules. Such a person would not be named, but disclosure of his or her job description and the basis of the compensation (commission computations, etc.) would be required.

Geoff Loftus: What will be new in the summary comp table?

Brian Lane: The summary compensation table will include a column for each of the following disclosures: (1) total compensation; (2) salary; (3) bonus; (4) stock awards; (5) option awards; (6) non-stock incentive plan compensation; and (7) all other compensation. These disclosures will be required for the CEO, CFO and the next three most highly paid executives based on total compensation, not just salary and bonus.

Geoff Loftus: Will tax gross-ups be required in the summary compensation table?

Brian Lane: Yes, tax gross-ups and other reimbursements of taxes relating to any compensation are currently required to be disclosed in the summary compensation table and would continue to be required to be disclosed under the rule proposals. Specifically, this disclosure would be required to be separately quantified and identified in the tax reimbursement category, even if the associated perk is eligible for exclusion (such as a relocation plan that does not discriminate in favor of executive officers) or does not require separate identification or quantification in a footnote.

Geoff Loftus: Do you think that the rules become effective in time for the 2007 proxy season? And should companies be doing anything for their 2006 proxy statements to prepare for the new rules?

Brian Lane: By all appearances, SEC Chairman Christopher Cox seems to have great interest in this rule proposal. It is thus very possible that the SEC will adopt final rules later this year in time for the 2007 proxy season, in which case, issuers will need to comply with the rules in connection with their 2007 proxy statements. For the current proxy season, companies should focus on the SEC's interpretive guidance on perks that was issued in the executive compensation rule proposals and make sure that the perks disclosure in their proxy statements is consistent with the newly-issued interpretive guidance.

Next, companies should be aware that compensation decisions that are made this year could very likely be subject to disclosure under any new rules effective for next year and should thus begin thinking about compliance for next year. For example, the rule proposals would require disclosure regarding compensation consultants, including their identification, the material elements of instructions or directions provided to consultants regarding their performance under the engagement and the identification of any executive officers that the consultants contacted in carrying out their assignments. Accordingly, companies should consider keeping a record of various compensation actions and procedures that have been followed in 2006.

Geoff Loftus: How will the proposed Compensation Discussion & Analysis differ from the current compensation committee report?

Brian Lane: The SEC has proposed a new Compensation Discussion & Analysis (CD&A), which will replace the current compensation committee report and performance graph. In order to address the boilerplate that the SEC believes compensation committee reports have produced, CD&A's purpose is to provide material information regarding compensation objectives and policies for named executive officers and takes a "principles-based" approach to disclosure. I have concern whether this will not just become different boilerplate.

The SEC also proposes to change the liability in this area. In contrast to compensation committee reports, which are deemed to be issued by compensation committees and not "filed" for purposes of Section 18 of the Exchange Act, CD&A would constitute disclosure by the company and deemed "filed" for purposes of Section 18. Moreover, if the CD&A is incorporated by reference into a Form 10-K or Form 10-Q, then it will also be covered by CEO and CFO certifications.

Geoff Loftus: Where will the discussion of the independence status of directors be found in the proxy statement?

Brian Lane: The SEC proposes to consolidate disclosures regarding director independence and related corporate governance items into a single disclosure item (proposed Item 407 of Regulation S-K), which would consolidate all of the existing director and corporate governance requirements.

Geoff Loftus: What other tables will be required in the proxy statement? Could there be double-counting?

Brian Lane: There would be a total of nine tables required if the proposed rules are enacted. In addition to the summary compensation table, the proposed rules would also require a table for each of the following: (1) perquisites; (2) grants of performance-based awards; (3) grants of all other equity awards; (4) outstanding equity awards at fiscal year-end; (5) option exercises and stock vested; (6) retirement plan potential annual payments and benefits; (7) nonqualified defined contributions and other deferred compensation plans; and (8) Director compensation. These tables in some cases clearly overlap requiring disclosure of both amounts earned (or potentially earned) and amounts subsequently paid out which will lead to double-counting. The SEC explicitly contemplates this in the proposed rules release, but concludes that the "risk inherent in such double disclosure is outweighed by the clearer and more complete picture it would provide to investors."

Geoff Loftus: How will retirement benefits and post-termination compensation be disclosed?

Brian Lane: The SEC believes that post-employment compensation may constitute a significant commitment of corporate resources and a significant portion of a named executive officer's total compensation. It has thus proposed to enhance the disclosure requirements relating to retirement benefits and post-termination compensation. In particular, the SEC proposes (1) a new Retirement Plan Potential Annual Payments and Benefits Table, which would disclose annual benefits payable to each named executive officer, (2) a new Nonqualified Defined Contribution and Other Deferred Compensation Plans Table, which would disclose for the last fiscal year company and executive contributions, earnings, withdrawals and year-end balances; and (3) disclosure of payments and benefits payable upon termination or change in control, including quantitative disclosure of the potential payments and benefits and the reasonable estimates and material assumptions underlying estimates provided in this disclosure.

Geoff Loftus: Can you give us your thoughts on item 407 relating to director and director-nominee independence?

Brian Lane: Proposed Item 407 essentially consolidates in one location within the rules the various director independence disclosure requirements. If adopted, companies will be required not only to identify their "independent" directors, but also to explain the applicable definition of independence used in reaching the conclusion that a director is independent — whether it is an SRO-imposed definition or some other self-imposed definition of independence. For each director that is identified as independent, the company will need to describe any transactions, relationships or arrangements that are not otherwise disclosed pursuant to Item 404(a) of Regulation S-K, that were considered by the board under the applicable independence definitions when determining that a director is independent.

I don't believe this will have a big impact on most companies, other than to add more pages to SEC reports, but it will force some companies to disclose "close calls" where a relationship or arrangement with a director may have caused some boards to pause and consider the issue, but then ultimately conclude that the director was independent without further disclosure.

Geoff Loftus: How do you see the role of the compensation committee changing?

Brian Lane: The compensation committee will likely take on a more prominent role in the overall corporate governance process and their compensation decisions will become significantly more transparent to stockholders. As a result compensation committee members will be required to spend more time on this particular aspect of their duties as board members and to the extent decisions are made that are not viewed favorably by stockholders and institutions, such directors may face backlash in the future in the form of "withhold vote" campaigns which have become increasingly more popular these days.

Geoff Loftus: Will companies want an expert on the committee?

Brian Lane: I don't believe many companies will go out of their way to recruit and hire compensation experts to sit on their compensation committees. It is difficult enough to find qualified independent directors willing to sit on the boards of public companies. However, compensation committees are likely to [continue their current practice of] retaining executive compensation consultants, when necessary, to assist in making compensation decisions regarding their directors and executive officers.

Geoff Loftus: Who should engage compensation consultants?

Brian Lane: To avoid even the appearance of non-independence, it should be the compensation committee. Already most companies that I work with do this.

Geoff Loftus: What about management and the compensation committee using the same consultants?

Brian Lane: While the same consultant generally should not be used by both, there may be some efficiencies in employing the same consultant for various compensation purposes. The key is that the consultant should owe its first loyalty to the compensation committee.

Geoff Loftus: Do you think in the future there will be a requirement for fee disclosures for compensation consultants as is now done with independent accountants?

Brian Lane: To the extent compensation consultants are retained more frequently and relied upon to a greater degree than in the past, it is possible that the SEC or SROs will propose rules that would require such disclosure, but I don't see that happening anytime soon.

Special Feature: Compensation Disclosure Rules - Alan Dye & Mark Borges

The following interview with Society member Alan Dye, a partner at Hogan & Hartson LLP in Washington, DC, and Mark Borges, a principal for Mercer Human Resources Consulting, also in Washington, addresses issues raised by the SEC's proposed rules on Executive Compensation Disclosure and related matters. This article is adapted from the transcript of the Compensation Disclosure & Best Practices for Compensation Committees Teleconference of January 20, 2006 moderated by Pauline Candaux. Although the call took place before the SEC issued the rules and asked for comment, much of the commentary is still useful. The SEC's comment period extends to April 10, 2006. The Securities Law Committee is submitting a letter on behalf of the Society.

How will item 402 disclosures be broken down?

Alan Dye: The item 402 disclosures will be broken down into three main categories: annual compensation, equity incentive compensation, and post-employment compensation. It sounds like the summary compensation table is going to survive, although in a substantially modified form. The summary compensation table will continue to provide the three-year compensation history for the named executive officers.

The term "named executive officer" is going to be redefined to pick up specifically the chief financial officer as well as the chief executive officer. In addition, the definition will continue to include the next three most highly compensated executive officers. What is changing is that the determination of who is most highly compensated will be based on total compensation, not total salary and bonus. Another change is that companies will be required to disclose compensation paid to up to three additional employees who are not executive officers and who would have been included in the compensation table had they been executive officers. The existing rules permit companies to exclude compensation paid to certain people in extraordinary circumstances, such as overseas assignments, and certainly do not pick up anybody who is not an executive officer.

Does the proposal pick up somebody who — because he happened to sell lots of product in a particular year and then earned a lot of money in commissions — ends up being in the table even though he isn't really an executive officer of the corporation or any of its subsidiaries?

Mark Borges: Possibly. The SEC is proposing to include up to three non-executive employees whose total compensation exceeds that of any of the named executive officers. Consequently, because you look at the total compensation figure, which would, in the example you just cited, pick up something like commissions that wouldn't necessarily be considered conventional salary or bonus, a sales person who has a spectacularly good year could be subject to disclosure.

What will be new in the summary compensation table?

Alan Dye: The Commission is going to require that a bottom-line dollar amount be disclosed for total compensation paid to the named executive officers identified in the table. I think the total compensation figure will represent the sum of the individual items of compensation listed in the table. Those totals will be what determines who is a named executive officer. That will be based on total compensation, and not just salary and bonus any more.

Another thing that will be new in the summary compensation table is a requirement that options and other equity grants be represented as a dollar amount rather than a number of underlying shares. Instead of showing, as we do now, the number of shares subject to an option or an SAR, companies will show the dollar value of the grant, which will be calculated in the same way that fair value is determined under FAS 123R for option expense purposes.

Do you think that disclosure of tax gross-ups is going to be required as part of the change-in-control disclosure?

Mark Borges: Boy, I sure hope not, but I'm afraid that it may be contemplated by the proposals. I'm not expecting the SEC to give us a detailed set of requirements as to how you do the calculations. I think they're probably going to leave it to the company to come up with the number and then explain how it was reached. So if you have a change of control arrangement that includes a tax gross-up provision, the company will have to estimate what the possible pay-out for that particular provision could be – including the tax gross-up amount. And presumably the SEC would want you to explain how you arrived at that number.

What is a perk?

Alan Dye: Interestingly, the Commission is going to provide guidance in the release on what constitutes a perk. I'm sure everybody remembers the two Commission releases from the late 1970's where the Commission and the staff provided guidance on what constituted a perk and how a perk should be valued for disclosure purposes. The Commission rescinded those releases years ago and since then hasn't been willing to give a view as to what constitutes a perk.

I think, given the way the public company community has tended to identify and value perks, that the staff has decided that it's better that they weigh in on the subject. It's hard to know what level of guidance we'll get in the release, but it does appear that the staff is going to identify what constitutes a perk.

Is there a new threshold for perk disclosure?

Alan Dye: The perks column will stay in the summary compensation table, but the Commission is dropping the disclosure threshold to $10,000. So if total perks and other personal benefits exceed a value — and by value I think the Commission still means aggregate incremental cost — of $10,000, then the value of the perks will have to be included in the table.

$10,000 is clearly not a material number to very many companies. What do you think is going on there?

Alan Dye: I think the lower threshold reflects the hostility that the staff has shown to the position that some companies have taken that certain executive benefits have a business purpose and therefore should not be treated as perks. An example is mandatory use of corporate aircraft for personal travel, for security reasons. Another is installation of home security systems. I don't mean to suggest that the Commission is hostile to perks, only that the staff has concluded that perquisites are a substantial form of compensation, that there's been some leakage of them from the summary compensation table, and that the Commission wants to pick up every item of compensation.

Mark Borges: With this being in the form of guidance my sense is that this is something companies are going to have to pay attention to in connection with their current proxy disclosures, right?

Alan Dye: Yes, I expect that will be the case. It's hard to know how much of what we'll see in the release will be an explanation of how the new rules will work when they become effective, and how much of the discussion will be intended to tell us that we haven't been doing things right under the existing rules. To the extent the release suggests that companies haven't been doing things right under the existing rules, companies will need to consider that guidance when providing current disclosure.

The rules will become effective for the 2007 proxy season — correct? Should companies be doing anything in their 2006 proxy statements?

Alan Dye: It seems to me the two areas where we're most likely to see in the release some suggestion that we're not doing things right now, so that we should be getting things right in our 2006 proxy statements, are perquisites disclosure and compensation committee reports.

I think the reason that the compensation committee report — as it currently stands — is being abandoned is that the staff believes companies haven't been providing the disclosures that they should. The compensation committee report was not intended to be boilerplate and was supposed to give the reader a peek into the minds of the compensation committee members. The staff believes, I think, that the compensation committee report hasn't been doing that, and has become boilerplate.

The new requirement to include a compensation discussion and analysis will replace the compensation committee report, and I think the discussion in the release might be intended to address current noncompliance with the disclosure requirements applicable to the compensation committee report. The discussion of the new compensation discussion and analysis may also tell us what the staff thinks should be included in this year's compensation committee report, under the existing rules.

How will the compensation discussion and analysis differ from the current compensation committee report?

Alan Dye: The discussion is going to address specified issues more precisely and will be less boilerplate than what companies are providing now. Inevitably, most disclosures that have to be repeated annually don't look a lot different from year to year within a particular company.

What are the issues that the new compensation discussion and analysis will have to address?

Alan Dye: It looks like the SEC wants to make sure that the committee explains how the compensation it's paying addresses the lofty goals that the compensation committee report tends to express as the objectives of the compensation program.

First the discussion will have to identify the objectives of the compensation program. I think most companies do that now in their compensation committee reports, as part of the discussion of the philosophy of the Committee. But now there will need to be some additional specificity as to what each element of the compensation program is: the option program, the cash incentive program, the restricted stock program, and the like.

I think where we might see more detail required is with respect to why the committee chose each of those elements as opposed to other elements, what behavior the committee was trying to reward and not reward, and how the committee determined the amount of each element.

The SEC staff has been issuing comment letters on compensation committee reports for years, saying that the report should articulate more clearly why an option grant was sized the way it was, and what factors were taken into consideration by the committee in making that determination.

I think most compensation committee reports haven't done that. To the extent that they have done that, they've addressed that issue only for the CEO. I think the Commission may require in these new rules that these decisions be explained for each of the named executive officers.

Mark Borges: I get the sense that that's probably where the proposal is going to start because I agree with you — I think the staff, at least, if not the Commission, has felt that companies have not gotten into the level of specificity and detail that they want around how these decisions were made.

In the last couple of years, I've seen a number of companies begin to list the accomplishments of, at least, their CEO, which supported the company's decision to pay that individual at a specific level with respect to salary and equity compensation. And I think that's the direction that the staff wants these reports to go so that instead of simply saying we pay for excellent performance and our CEO performed exceptionally well, they're going to be looking for some of the details that went into the specific numbers.

I'm expecting, particularly given the likely level of staff review, that in the first year we're going to see that these are the kinds of reports that are going to fair well with the staff in terms of providing a specific explanation as to how the totals were reached for each different element of compensation that the company is agreeing to pay.

Alan Dye: One other item that the new section on compensation discussion and analysis is supposed to address is how each element of compensation that was awarded or paid in a particular year helped achieve the committee objectives that were articulated at the beginning of the discussion.

Will the new rules affect pay structure? If so, how?

Mark Borges: One of the things that has crossed my mind about these disclosure proposals is whether they are intended to be a subtle nudge on the part of the staff to move companies towards more pay-for-performance related arrangements rather than service-based arrangements. Because clearly, it's going to be much easier, presumably, to justify what you're paying if you can tie it directly to metrics that indicate how the company has performed through the efforts of this individual rather than simply saying that we're awarding somebody a fixed amount of equity or bonus pay and all they have to do is stay employed in order to earn that amount.

Some have suggested that the revised compensation table is as much about wealth accumulation as current income. Would you care to comment?

Alan Dye: There will be a new requirement to disclose in the summary compensation table the increase of value of pension plan payments to executives. The amount to be included will be just that year's incremental increase in value. So the reader will see that increase included in the bottom line total compensation, even though the amount may not have been paid out. Another item along those lines is that the table will include a separate and new column for earnings on deferred compensation, not only the above market earnings. This disclosure gets to wealth accumulation. And then finally, as we've already said, there will be a bottom line disclosure of all of the elements of compensation included in the table. There will be a figure that people will be able to look to, to say this is the total compensation paid to the named executive officers or earned by or accrued to the executive officer during this year.

Will the new summary compensation table be the same as a tally sheet? Are tally sheets more necessary now than ever before?

Alan Dye: I don't think that the information in the summary compensation table will include all of the information included in a typical tally sheet. A tally sheet is used by the compensation committee to view all of an executive's current compensation, accumulated wealth, past and outstanding equity grants, and the value of welfare plan benefits. Many of those types of compensation or accumulated wealth will not appear in the summary compensation table, but may appear elsewhere in the proxy statement under the new rules. There will be a couple of supplemental tables that will accompany the summary compensation table and that will pick up equity grants by number of shares instead of dollar amounts. That disclosure will be broken out in two tables, as I understand it. One table will be for performance-based equity awards, and the other will be for all other forms of awards, for example time vesting options and the like.

What other tables will be required in the proxy statement?

Alan Dye: The new rules will require a separate table showing total contributions to, earnings on, and withdrawals from deferred compensation plans. That table will be in addition to the disclosure in the summary compensation table of earnings on deferred compensation. Currently, there isn't a separate table that calls for this information.

Is there the possibility of any double counting?

Alan Dye: There will now be a requirement to have that separate disclosure from the summary comp table. I'm just guessing that we also will have to include deferred salary in the salary column of the summary comp table.

Mark Borges: Yes, I suspect that it will end up appearing as part of the summary comp table. And then, to the extent that a portion was deferred, it will appear again in this second table. So there will be the potential for double counting, depending upon how people use the two tables together. I think this possibility rears its head in a couple of different areas when you begin looking at some of these ancillary tables and their relationship to the summary comp table.

Alan Dye: With that good segue, the second main category of executive compensation disclosures is going to be the section that will deal with pre-existing or outstanding equity awards. I guess I shouldn't say pre-existing, because I think these tables will pick up awards that were made during the fiscal year to which the proxy relates as well as prior grants. There will be required tabular disclosure of all of each named executive officer's outstanding equity awards as of the end of the year, and the potential value of those awards. I think the table will pick up more than just options, which companies are already required to include in the table as vested and unvested options. The new table will show the entire amount of equity awards, including, for example, restricted stock and restricted stock units that have not yet vested.

Mark Borges: Yes, it appears to me, if I'm reading these proposals correctly that this table combines what companies are already including as a footnote to the summary comp table about the year-end value of restricted stock holdings with at least a portion of the Aggregate Option Exercise Table that requires disclosing the unrealized appreciation in outstanding options. I guess those would be the two major pieces along with any other equity awards that would be outstanding at the end of the year.

Alan Dye: Yes, I think that's right. And then a second table would require disclosure of option exercises during the year, which is already a required item under current item 402. But in addition the table would have to show the dollar value of vestings of equity awards during the year. That would include, for example, restricted stock as to which restrictions lapsed during the year. I think companies will be required to disclose the dollar value of those awards. I don't know whether the value will be determined as of the date of vesting or the last day of the fiscal year, but presumably the date of vesting. In any event, I think this is going to be one of those skin-in-the-game type disclosures addressing how much equity the executive now owns, how much value was actually realized during the year and how much cash the executive got out of the exercise of an option or the value of the stock that was issued on exercise of the option.

How will retirement benefits and change of control payouts be disclosed?

Alan Dye: There will be a section that will call for disclosure of future payouts including future contingent payouts, the value or amount of retirement benefits and change in control payouts.

And that disclosure, which again will be tabular, will require individualized quantification of the amounts payable to the named executive officers. For example, in a typical proxy statement today involving a defined benefit plan or pension plan that pays out based on years of service and most recent compensation over a period of time, instead of having a table that shows "what ifs," or the amounts that would be payable if a person had served this many years or had made this much money, the new disclosure would show the amounts that actually would be payable to the named executive officers under the plan. And the disclosure will pick up not just the retirement plan or the defined benefit plan but also non-qualified deferred compensation plans, including, I think, the year-end balance for each named executive officer in the deferred compensation plan. The disclosure also will include the accruals during the year under the deferred compensation plan, broken down by employee contribution, employer contribution and how much was earned.

If there were any withdrawals during the year, the withdrawals would also be listed and reflected in that table. And then, finally, the change of control payouts and other benefits, including perks, that would be payable to the named executive officers upon a change of control would have to be quantified.

Mark Borges: It's already giving people fits as they speculate about how these disclosures are actually going to work. Anyone who has spent some time looking at these retirement programs and how the different values are calculated can appreciate that the numbers can be quite different depending upon the assumptions that one uses. And some of those assumptions involve making estimates as to future events such as future interest rates, future tax rates, future earnings levels, all of which can significantly influence what those numbers will look like.

Would you tell us about changes to item 404?

Alan Dye: Yes, although the Staff has been somewhat vague on that subject. Initially at least they're going to raise the dollar threshold in 404(a) from $60,000 to $120,000. And they're going to expand in some manner the people who are considered to be related parties for purposes of item 404. I've heard that might just involve expanding the definition of a related party's immediate family. But in any event, it looks like there will be some expansion of who is subject to the disclosure requirement.

The Commission also is going to make the rule more principles based, which I think means that they're going to either reduce or eliminate or refine in some fashion the safe harbor items that are currently in the instructions to item 404(a). And surely they'll get rid of instruction 9, the instruction that says even if the rules seem otherwise to require disclosure a company can in an individual circumstance conclude that the transaction is just not a material transaction and therefore need not be disclosed.

And, if I'm understanding correctly, 404(b), the separate disclosure item that applies only to outside directors and that allows non-disclosure of a relationship between the company and another company of which that outside director is a director or an executive officer if the amount of business doesn't exceed five percent of the revenues of either company, is going to be moved into 404(a) if it survives at all. I think item 404(a) is going to be where all of the related party disclosure requirements will appear. The disclosure of related party indebtedness that's currently required under item 404(c) has become all but a dead letter with Sarbanes-Oxley's prohibition on personal loans to executive officers. Item 404(c) is going to be made consistent with Sarbanes-Oxley, because Sarbanes-Oxley has some express exceptions from the prohibition on personal loans to executives. Those exceptions are likely to be reflected in item 404 now, and the requirement to disclose indebtedness also will become part of 404(a).

There's also a new disclosure requirement to describe policies and approvals regarding related party transactions, and it appears that that requirement is going to be part of item 404, too. All of the exchanges and Nasdaq have their own requirements or at least guidance, in the case of the New York Stock Exchange, on how related party transactions should be monitored and overseen at the board level.

Can you give us your thoughts on item 407 relating to director and director nominee independence?

Alan Dye: That's going to be a difficult disclosure requirement to comply with, or at least to determine the parameters of, because the item asks companies to identify and disclose in the proxy statement relationships that nobody considered to be material and that didn't trigger a board determination of non-independence.

So, the new item will call for a description of an amorphous category of relationships that arguably could include such relationships as children going to the same school or directors who went to the same college or who are members of the same country club. But, assuming that companies don't end up having to go into some ridiculous areas of disclosure, the upshot is that will be a new disclosure requirement to disclose independence determinations.

Also, the compensation committee disclosures are going to become more detailed regarding the processes the committee followed, which probably will track the type of disclosure that's required currently for audit committees. Companies will want to keep a better handle on the procedures and processes that the compensation committee is following, because those procedures and processes will have to be disclosed.

The other disclosures that are currently required by Item 7 of the proxy rules, regarding the number of meetings held by and the actions taken by various committees of the board are going to get moved into this new item 407.

How do you see the role of the compensation committee changing?

Mark Borges: There are about a half-dozen things that I think everyone expects the compensation committee to be involved with, starting first and foremost with monitoring the company's overall pay program from the shareholders' perspective. That is, they should be looking out for the shareholders' interests in deciding whether or not the company's compensation program is structured to meet its business objectives.

What other areas should the committee address?

Mark Borges: The compensation committee has been, and will continue to be, responsible for overseeing the company's pay philosophy and programs. On the pay-for-performance front, the comp committee is in charge of making sure that appropriate performance metrics have been set for the performance incentive programs that the company has, evaluating performance and then determining the amounts that are going to be paid out on the basis of the performance levels that have been achieved.

You also see that the comp committee is responsible for specific executive pay decisions - at least for the CEO and, in many instances, for the other executive officers as well. At a minimum, the committee is at least making recommendations to the full board with respect to the actual pay amounts that are going to go to these individuals.

As a practical matter, what you see the comp committee doing these days is largely discharging the board's responsibilities to oversee the pay program by setting the compensation levels for the CEO and the other senior executives, approving and then monitoring the effectiveness of the company's executive compensation plans, policies and programs, providing general oversight of the company's incentive compensation, equity compensation, and benefit programs for the general employee population, and then reviewing and guiding the company's overall human resources program.

And in some instances, although this isn't true in every company, the comp committee may be involved also in setting director comp. I think in most organizations these days that's still the responsibility of the governance or nominating committee but there are some companies where the comp committee not only handles executive comp decisions but sets the pay levels for the board of directors as well.

If compensation consultants are engaged, who should engage them? And what do you think about management and the compensation committee using the same consultants?

Mark Borges: Well, the issue here is: Is the committee receiving objective, independent advice from its outside advisors? I think that, traditionally, management was probably largely responsible for retaining consultants since the company was probably the ones that used them most extensively. Certainly in the last two or three years we've seen a shift, as a result of New York Stock Exchange requirements and other rules as well as various "best practices" recommendations, for responsibility for engaging consultants to move over to the comp committee.

In my experience, this shift has taken place; today, most large companies give or vest in the comp committee responsibility for selecting the consultant. And it seems to be the prevailing notion that if you can find a consultant that can work with management even though it has been retained by and reports to the committee, you're probably better off using that single consultant. In other words, as long as the consultant reports to and is responsible to the committee, with adequate disclosure and committee approval he or she should also be able to perform certain assignments for management.

That's where things are right now. Certainly there's the prospect, particularly if these disclosure proposals get into the details of the committee-consultant relationship that we may see more of a push towards having the consultant report to and work exclusively for the committee and the board and have no or only minimal contacts with the company outside their executive compensation assignment.

Do you think there will be a requirement for fee disclosures in the future as is now done with independent accountants?

Mark Borges: Well, that's a possibility. I know that in Canada that took place last year as a result of changes in their regulatory requirements as well as best practice recommendations from investor organizations. I think, again, it goes to the question of whether the committee is getting independent advice. Thus, the amount of compensation that the consultant is receiving from the company, both for its committee work as well as for other general assignments, may, in fact, be a relevant consideration.

I haven't seen anybody requesting that type of disclosure today, but that doesn't mean that it may not become information that investors are interested in down the road. Again, I think if you harken back to the audit committee situation we may just be in the early stages of a process that, in a few years, may eventually resemble where things are with audit firms.

Would you comment on the detail and extent of minutes of compensation committees proceedings?

Alan Dye: Sure, I'll offer my views and what my experience has been to date. There have been two schools of thought on the keeping of minutes, as you know, since the beginning of minute taking. They tend to boil down to those who keep short minutes and those who keep long minutes. I'm in the school that believes in keeping short minutes, subject to exceptions in appropriate circumstances. After the initial Disney decision, I felt like it made sense, as a matter of best practices, to keep more detailed minutes of compensation committee meetings than had previously been customary. The longer form of minutes would list all of the items that were considered and, if the committee considered a potentially controversial issue, say, the hiring of a new CEO, perhaps even include attributed statements from various directors, to reflect the dialog.

Given where the Disney decision came out, even in these more unusual and potentially controversial contexts, I don't suggest detailed minutes of the type that you would see in considering a merger proposal, for example. In the merger context, boards tend to have very detailed discussions and have minutes that reflect those detailed discussions. I don't think it's necessary to follow that practice in compensation committee minutes.

Compensation committee minutes now need to reflect whatever the matter was that was being considered by the directors and to show that there was adequate discussion of the matter and any supporting documentation that was provided to the committee. If a compensation consultant provided a report, then there ought to be a reference to there having been a discussion of the compensation consultant's report.

My bottom line is that I don't think of the compensation committee minutes as now requiring a lot of detail to make them bullet proof against something like a Disney action. And I'm not seeing any practice that's inconsistent with this observation.

Finally, what is your view on benchmarking?

Mark Borges: Well, it's come under heavy criticism for various reasons. And I do think that while benchmarking serves a purpose, companies need to be sure to explain clearly how it is being used. Companies need to be careful how they're using the information that's being provided, and they also need to be considerate of how they're disclosing their use of benchmarking because it's gotten so much bad press and has been pointed to by so many as being one of the sources of spiraling compensation.

But today for purposes of being able to measure where you are relative to the market and relative to your competitors and your peers it does seem to be the most sensible way, as a starting point, to get into that particular analysis and discussion.

Society Updates: Chapters, Committees, and Staff News

Chapter Events

Chicago Chapter

Wednesday, April 5, 2006 - Carlucci's Restaurant, Rosemont

Houston Chapter

Thursday, April 6, 2005, 6:30 p.m. - Annual Meeting Dinner
Location to be Announced

Northern California Chapter

Tuesday, April 11, 2006
Annual NIRI co-sponsored event with Lou Thompson

Ohio Chapter

Thursday, April 20, 2006 - Breakfast Buffet Meeting -
The Union Club - Topic To Be Determined

Friday, May 19, 2006 - Annual Meeting
Lunch Meeting - The Eaton House

Rocky Mountain Chapter

Thursday, April 20, 2006, 11:30 a.m.
Where: TBD - Topic: Corporate Practices

Southeastern Chapter

May 18 - 21, 2006
Hilton Oceanfront Resort - Hilton Head Island, South Carolina

Corporate Practices Committee

This committee has two publications that are nearing completion: the first, the updated edition of the Board Practices Survey will be available this spring. Also out in the spring: Lead Directors, thanks to the efforts of Iris Aberbach.

Securities Law Committee

The committee has filed Comment Letters on:

• Internet availability of proxy materials,
  led by Marie Oh Huber.
• Tender Offer Best Price Rule,
  led by Marilyn Mooney.

The drafting committee is working on a comment letter on executive and director compensation disclosure and related matters, due April 10.

The SLC sponsored a teleconference on the then-just-announced compensation disclosure proposals and best practices for compensation committees. Alan Dye and Mark Borges were presenters; Pauline Candaux moderated.

The PCAOB Subcommittee, led by Stacey Geer, drafted a letter to the PCAOB Board in response to the Board's inquiries about improvements we would seek, such as desired amendments to AS 2.

Public Company Affairs Committee

PCA is setting up 2 subcommittees to more effectively engage with 3d party groups. One subcommittee will be a continuing interface with the corporate governance and proxy proposal rating/advisory services such as ISS and Glass Lewis; goals will include more consistent and on-going dealings with those organizations to provide and receive information and aid in providing issuer input in policy formulation. A second subcommittee is planned to work with ADP and other information distribution intermediaries; goals will include taking better advantage of data which is available on proxy and other mailing/internet distribution and to provide issuer input on distribution processes and policies. Committee members will be solicited to join the subcommittees in the near future.

Society Staff News

In recent months there have been a few changes in the staff at the Society's New York Office:

Olga Holmes was promoted to Office Manager. Olga has been with the Society since April 15, 1996.

Deborah Fox was promoted to Director of Membership. Deborah first joined the staff November 6, 1997.

Ophelia King was promoted to Director of Meeting Administration. Ophelia has been with the Society since March 14, 2000.

Jose Garcia joined the Society as Office Assistant, where he supports general office management as well as the Society's Information Technology department.

Raul Matos joined the staff, becoming the Billing Coordinator and working closely with Sara Berman, the Society's Senior Vice President and chief financial officer.

The Corporate Secretary & Governance Professional is published quarterly throughout the year as a service to members of the Society of Corporate Secretaries and Governance Professionals. Articles or statements appearing herein do not constitute legal opinion, advice or judgment and should not be relied upon as such.

Inquiries regarding the content of this newsletter should be directed to Geoff Loftus: (212) 681-2000, gloftus@governanceprofessionals.org. Inquiries regarding membership or publication orders should be addressed to:

Society of Corporate Secretaries and Governance Professionals
521 Fifth Avenue New York NY 10175
212-681-2000 - Fax 212-681-2005

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