The SEC's expanded governance and executive compensation disclosure requirements; New rules for the 2010 proxy season take effect on February 28.

• Author: Karp, David C.

Late last year, the SEC adopted final rules that broaden the scope of required corporate governance and executive compensation disclosures in public company proxy statements. These enhanced proxy disclosure items reflect a heightened political and regulatory focus on corporate practices that some have linked to the economic turmoil of recent years.

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Boards will need to address these new disclosure requirements promptly, as they become effective on February 28, 2010, in time for the 2010 proxy season. Preparation will largely involve expanding the information collected by those responsible for drafting the company's proxy statement and board discussion concerning the presentation of this information in compliance with the new requirements.

Enhanced Corporate Governance Disclosures

In response to a perceived failure of risk management at some financial firms, the rules require a proxy statement description of board supervision of the corporate risk function. Importantly, the rules recognize that company executives are responsible for day-to-day risk management and instead focus only on the board's oversight role. Audit committees of NYSE-listed companies have for some time been required to discuss policies with respect to risk oversight, and accordingly these discussions will in many cases be the focal point for developing disclosures in response to the new mandate.

The new rules also expand required disclosures about directors and director nominees, mandating an annual discussion of the specific experiences and skills relevant to service as a director. In addition, the rules impose longer look-back periods for disclosure of other directorships (5 years) and of legal proceedings (10 years), with an expansion of the types of disclosable legal proceedings. Directors will need to thoughtfully respond to longer D&O questionnaires being developed by companies to elicit information necessary to comply with the new requirements.

Over the past decade some companies have separated the Chairman and CEO positions while other companies have named a lead director. Companies will now be required to describe, and justify, in their proxy statements their leadership structure, including whether and why a company has chosen to combine or separate the CEO and Chairman positions, and whether and why a company has a lead independent director. Compliance with this requirement should not be difficult, but companies...