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A Look Behind the Enhanced Proxy Disclosure Rules

Laurie Smilan, a senior partner at Latham & Watkins and an adjunct Professor of Law at Georgetown University Law School, has published an insightful memo candidly examining the SEC's new proxy disclosure rules requiring disclosure about board leadership structure and qualifications, risk and risk oversight, and  compensation issues.  Smilan warns registrants drafting their new disclosures to be mindful of the SEC's motivations behind the new rules, in order to comply with both the letter and spirit of the rules. 

But almost as important as the substance of the rules, well documented elsewhere, are the underpinnings of the new requirements – the SEC’s un- or understated objectives in promulgating the new rules. In order to assure compliance with both the letter and the spirit of the rules, practitioners should be mindful of the repeatedly denied but fairly obvious governance “best practices” agenda that animates the rule making.

Smilan sees this new set of disclosure requirements as part of a pattern of the SEC's use of disclosure requirements to regulate corporate governance by encouraging boards to examine and improve their governance policies and structures. 

First, there can be no serious doubt that the rules reflect an expectation that boards will re-examine and in many cases improve their corporate governance policies and practices. In this respect, the new rules are the latest installment in what some characterize as the Commission’s ongoing effort to regulate corporate governance by the imposition of targeted disclosure obligations, despite the fact that the SEC lacks a clear mandate to regulate corporate governance (and denies any such intent), an area traditionally the province of state law’s more laissez-faire approach. . . . While the SEC cannot mandate a particular governance process or policy (as it recognizes throughout the Adopting Release), the new rules certainly will require boards (1) to reconsider and re-evaluate existing policies and practices (or the lack thereof) targeted by the disclosure rules and (2) decide whether changes are necessary, and (3) whether changes are made or not, explain the reasons “why.” An unexamined process, an unexplained decision concerning governance matters covered by the rules, a failure to provide detail or the drafting of boilerplate will not suffice.

Smilan's article looks at each of the newly required disclosures, and attempts to peer behind the curtain to see what the SEC is really getting at.  In particular, Smilan looks at what the SEC may really want when it comes to disclosing the board's role in the risk oversight process.

The Adopting Release suggests that “[d]isclosure about the board’s approach to risk oversight might address questions such as whether the persons who oversee risk management report directly to the board as whole, to a committee, such as the audit committee, or to one of the other standing committees of the board; and whether and how the board, or board committee, monitors risk.” The Release also posits the possibility of a separate risk committee and suggests that some description of the process and individuals responsible for providing information to the board might be useful to investors. Given the source, these suggestions are probably a good place to start. Boards might also consider continuing education on emerging risk management.

. . .

Going forward, boards and their advisors should make sure that the quality of their deliberative process is as good as possible and that this is apparent in the company’s disclosures. Where the deliberative process is in fact rich and considered, as is usually the case, the board can get credit not only for its good decisions but also its good decision making by providing fuller disclosure. And if board process could be better, the rules offer an opportunity for beneficial self-examination and improvement. The hope is that these new (and any) disclosure requirements will not only prompt better decision making, but also help to prevent bad decisions from being made.

Smilan concludes by positing that the SEC really is trying to get at "why" decisions are made in the board room, not necessarily how.

As the Adopting Release admonishes, “we would not expect to see generic or boilerplate disclosure that [policies] are designed to have a positive effect, or . . . may not be sufficient to [achieve some general corporate purpose].” Instead, as the staff has already warned: “When a company explains its . . . decision-making processes but does not explain why it made the . . . decisions it made, we will ask for enhanced disclosure of the analysis,” — in other words “why?”

The full text of Smilan's memo is available at: