Category Corporate Governance

RMG’s GRId Locked

RiskMetrics recently announced that it will replace its Corporate Governance Quotient (CGQ) system with Governance Risk Indicators (GRId).  You can read more about this new system here: http://www.riskmetrics.com/grid-info

GRId launched March 17, 2010. RMG Proxy Research reports published during the second half of March 2010 will display the new GRId metrics. CGQ scores are now frozen and will completely go away by the end of June 2010. As with CGQ, corporate issuers will have an opportunity to review the data used by RMG in developing the company’s GRId assessment, and can also model out changes to determine potential impact under the GRId analysis.  Importantly, unlike CGQ, GRId is an absolute measure of a company’s risk indicators. For more information, corporate issuers can review the FAQs put together by RMG: http://www.riskmetrics.com/sites/default/files/FAQ-GRId-corporate.pdf

Here is a summary of several GRId related services that might benefit corporate issuers:

  • GRId Data VerificationAll covered companies will have access to a complimentary data verification tool enabling users to check the accuracy of their data, request changes to the data, and view GRId indicators which will be updated at this site on a monthly basis. All requests for data verification will be responded to via email within 72 hours. For more information, please access the following link: http://www.riskmetrics.com/data_verification
  • Governance Exchange – Governance Exchange combines research, analytics and engagement to deliver a comprehensive corporate governance solution to corporate issuers. Online discussion forums facilitate constructive dialogue on corporate governance issues between corporate executives, institutional investors and board directors, fostering improved engagement and enabling members to share and advance their own ideas and experiences. In addition, members have access to a diverse range of corporate governance viewpoints and critical information, including webcasts, white papers, surveys, and expert analysis. Corporate issuers also have integrated access to our core governance tools, GRId Analytics (see below), GRId Pre-Scoring (see below), Voting Analytics and Resource Center, resulting in a single online platform to support your corporate governance needs. You also have access to a dedicated team of corporate advisors that specialize in providing data, analytics and reports to executives and board members. For more information, please access the following link: http://www.riskmetrics.com/governance_exchange/issuers
  • GRId Analytics – Subscribers to GRId Analytics have access to new modeling and analytical tools relating to the new GRId methodology. These tools include what if analysis, peer comparisons, new tear sheet GRId reports, new customized reports showcasing your company’s corporate governance strengths, the ability to drill down into the database to identify trends, insights into peer practices, and a dedicated advisor. For more information, please access the following link: http://www.riskmetrics.com/benchmarking/GRId_analytics
  • GRId Pre-Scoring – Subscribers to Governance Exchange will have the ability to obtain unofficial GRId pre-scores. Official GRId scores will be produced on a rolling basis. If a company’s annual meeting is from April-May, their first official GRId score will be published on RiskMetrics Proxy Analysis for that shareholders meeting.  If the annual meeting is before April or after May, the first official pre-score will be available by June 30. Therefore, companies may want to see pre-scores in order to get a sense of where they may stand when their official score is released. This solution provides that capability.

If you are interested in any of the above tools and would like to receive a 10% discount on your purchase of them, please contact me at edward.hauder@exqty.com and I can provide you with information on how you can.

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RMG Issues FAQs on New SEC Proxy Disclosure Rules

RiskMetrics Group (RMG) recently issued several FAQs related to the new SEC proxy disclosure rules.  Previously, I blogged about the RMG FAQ regarding Compensation Risk Disclosures, and today I will address the two other FAQs, one on compensation consultant conflicts and the other on the enhanced disclosure about directors – qualifications, diversity policies, and board leadership and risk oversight of risk management.

Compensation Consultant Conflicts

RMG was asked whether it would do with compensation consultant fee disclosures.  RMG indicated that since this disclosure is new, it is waiting to gather and analyze the data after the proxy season and develop any new policies in consultation with its clients.  So stay tuned, this one has the feel of the director overboarding issue and the tax gross-up issues which RMG first took some time to study and then came out with policies that directly dealt with the issues.

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Directors Enhanced Disclosures

RMG was asked what its views and the prospects for related voting recommendations were given the new director qualifications, diversity policies, and board leadership and oversight of risk management disclosures. Again RMG deferred a bit indicating that it was waiting to gather information and analyze the disclosures made this proxy season, but would not implement any policy changes as a result of these disclosures for 2010.  My guess is that RMG will study the disclosures made, discuss the issues internally and with its clients and develop a set of new policies for 2011 that will seek to encourage a minimum level of disclosure on these issues and some minimum level of corporate governance as to this items.

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RiskMetrics Weighs In on Compensation Risk Disclosures

The new proxy disclosure rules (Item 402(s) to be precise) require public companies to include a narrative disclosure discussing the company’s compensation policies and practices as they relate to the company’s risk management if risks arising from the company’s compensation policies and practices for its employees are “reasonably likely to have a material adverse effect on the company.” The new rule does not require a company to provide a negative disclosure, e.g., “We reviewed our compensation policies and practices and found no material adverse risks.”

Speculation is that the SEC Staff likely will focus on this Item 402(s) disclosure as part of its review of proxies filed during the 2010 proxy season. However, it is unclear whether these comments will be primarily filed this proxy season as it is the first in which this disclosure will be in place, and will then be somewhat dropped going forward.

Companies considering how and where to address this disclosure item in their proxies need to also consider a FAQ issued yesterday by RiskMetrics Group (along with 2 others I’ll deal with in another post):

What will RiskMetrics be looking for in the new disclosure requirement on risks raised by compensation programs? In particular, how will RMG react to non-disclosure?

RMG understands that issuers typically do not like to provide negative disclosures (e.g., “we found no material adverse risks caused by compensation”) due to concerns over liability, and the SEC generally does not require them to make such statements. As a result, some companies may choose to say nothing in their proxy statement this season with regard to searches for material adverse effects from pay which conclude there are no such risks. While RMG does not have a policy regarding non-disclosure, we advise issuers to, at a minimum, talk about their process and any mitigating features (such as claw-backs or bonus banks) that they have adopted. We view this disclosure as an opportunity for communication, not simply compliance, and we expect that shareholders will be looking for a reasonably substantive discussion of the board’s process to determine whether the company’s incentive pay programs might motivate inappropriate risk-taking, and what they are doing to mitigate that.

RMG’s view may spur a few companies to address the risks associated with their compensation policies and practices and any risk assessment that was conducted.  However, note that this is not an RMG policy. As such, it is not required that companies follow this guidance from RMG or risk a negative vote recommendation against directors or an equity compensation plan proposal. That being said, companies may be better off coming up with a paragraph of disclosure that walks through the steps they have in place that mitigate any risks that exist, i.e. clawback provisions, stock ownership guidelines, stock retention guidelines, a particular balance of compensation, the performance goals utilized, mechanisms like bonus banks to keep a portion of previously “earned” compensation at risk, etc.  Doing so would be far more instructive to shareholders about what is currently in place to help mitigate risks than any statement that says, we found no risks to exist.  As such, this type of statement is likely to be well received by RMG and would not necessarily require a company to include a dreaded negative disclosure (“We determined after a careful review and assessment that Company does not have any risks  from its compensation policies and practices for its employees that are reasonably likely to have a material adverse effect on the Company”).

Of course, the next question is where to place this disclosure? I think most folks realize that it does not have to (and in the vast majority of cases should not) be included in the Compensation Discussion & Analysis (CD&A) section. However, the SEC Staff has issued guidance (C&DIs, Regulation S-K, Q. 128A.01) to the effect that it expects the Item 402(s) disclosure to be with the other Item 402 disclosures on compensation and would not expect it to be hidden, obscured, or difficult to locate. So, perhaps this should go somewhere in the narrative section following the Summary Compensation and the Grants of Plan-Based Awards Tables.

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NY Times Book Review: Money for Nothing

Today’s New York Times reviews a new book, Money for Nothing: How the Failure of Corporate Boards Is Ruining American Business and Costing Us Trillions, from a former investment banker, John Gillespie, at Lehman Brothers and Bear Stearns, and the co-founder of Salon.com, who worked at Dow Jones and Time Inc., David Zweig .

The book apparently looks at U.S. boards and shareholder rights, and posits that one of the reasons for the financial crisis was directors asleep at the wheel (or just warming seats). Also looks at the myth of shareholders rights, looking at actions by some of the failed companies for illustrations.

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