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The article below was published in Agenda, a private subscription newsletter for corporate directors, and is presented with permission.

For additional reporting of the corporate board perspective regarding SEC positions on compensation disclosure requirements, see


Agenda, October 15, 2007 article





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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