Months later and you're still recovering from proxy season? No worries: you're not alone. The fact is, anyone who had anything to do with filing a corporate proxy statement this year — the first year under new Securities and Exchange Commission rules designed to improve compensation disclosure — or who actually devoted the time and brain cells needed to review more than one or two proxies, is still shaking from all the caffeine they would have had to ingest.
The extra caffeine, of course, was needed to plow through what many have described as the most stressful proxy season ever. Now that it is essentially over, those who spend large chunks of their time focused on the annual proxy process believe that the really tough work is just beginning. That's because it's hard to find anyone who thinks things went smoothly in 2007. Not SEC chairman Christopher Cox, who has described the newly required Compensation Disclosure and Analysis (CD&A) section at many companies as being "as tough to read as a Ph.D. dissertation" and "a far sight longer than a full-length feature in The New Yorker," based on initial review of 40 CD&As by Toronto-based Clarity Communications. Not compensation consultants or corporate attorneys or directors or executives or even bloggers. And especially not investors, the very people the new rules were designed to help.
The big question, though, is what the SEC will do once it's done reviewing the 2007 crop of proxies. Although Cox and others have commented publicly on some aspects of the bunch, most notably their length and inherent confusion, the agency is expected to issue a comprehensive report this fall. Some believe, or perhaps hope, that the confusion may lead to wholesale changes for 2008. Others think that regulators are far more likely to take a carrot-and-stick approach — praising companies that embraced the changes while criticizing the ones that did a highly legalistic dance around them (see "A Season of Revelations" at the end of this article). Then there are those who expect only minor changes to fix the highly unusual problems that cropped up, such as the ability of Marshall & Ilsley Corp. to report that its former CFO, John Presley, made negative $315,734 in 2006. Indeed, compensation firm Equilar Inc. found that 2 percent of the 900 proxies it reviewed had executives reporting negative compensation.
Yet the very people who have complained the loudest bear much of the responsibility. That includes the SEC, which took too long to make the final guidelines available, gave companies plenty of wiggle room by allowing certain disclosures to be excused as "competitive information," and then changed a key compensation calculation on December 22 — the now infamous "holiday surprise." But the SEC has company: everyone from board compensation-committee members who tried to explain the methods to their madness in the CD&A to journalists who wrote formulaic stories bears some responsibility. Each had a role in muddying the results, which included a much-hyped "total compensation" number that turned out to be useless, and endless pages of footnotes attached to a so-called summary table.
"It's a classic case of too many cooks spoiling the stew," says Patrick McGurn, a corporate-governance expert and special counsel for proxy advisory firm Institutional Shareholder Services. "These documents were touched by too many people, and many of the disclosures felt like they had been written by committee."
Magnifying Glasses Needed
While proxy writing has always been something of a group effort, the new rules meant that the group was much larger. For one, because the statements had to be filed with the SEC, as opposed to merely being furnished, CFOs had to sign off on documents they probably had little direct involvement with before this year. Add inside and outside counsel, a compensation consultant or two, compensation-committee members, and the corporate secretary to the mix and even relatively small companies probably had close to a dozen people involved.
Little wonder that the typical proxy statement was 25 to 30 percent longer this year. Or that the extra length undoubtedly led to additional costs on everything from billable hours to proofreading — another focus of frustration with the process, especially for smaller companies.
To date, no actual studies of the added costs have been done. But the simple fact that the longer statements and additional costs didn't provide extra clarity means that things should change. At the very top of the list should be the "total compensation" number for each named executive officer (NEO) — a number that, in theory at least, was supposed to outline exactly how much a particular executive made during the previous year. It didn't, mostly because as part of its preholiday merrymaking, the SEC decided to require companies to include the accounting expense of options, as opposed to the options exercised, in the total compensation number. This seemingly minor change caused some companies, like the aforementioned Marshall & Ilsley, to report negative compensation and others to report inflated numbers that were not a reflection of the executive's actual compensation. The disappointment, especially from the investor community, was palpable. In his letter to the SEC, John C. Wilcox, senior vice president for major institutional investor TIAA-CREF, wrote that companies' initial responses may well "have the undesirable effect of undermining important goals of the compensation disclosure rules."
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