The SEC has adopted new rules requiring enhanced disclosure for executive compensation and corporate governance in proxy statements and annual reports. The new rules focus on pay risk policies, equity award valuation, compensation consultant disclosure, and board leadership structure. Companies must now analyze how compensation policies may incentivize risk-taking and provide additional disclosure if risks are reasonably likely to have a material adverse effect. The rules also require disclosure of director qualifications, legal proceedings, board diversity policies, and other expanded biographical information for directors and nominees.

1. Friday, January 15, 2010
SEC Adopts Enhanced
Compensation and Corporate
Governance Proxy Disclosure
Rules for 2010 Proxy Season
A Practical Approach to What Companies, Boards
0
and Compensation Committees Need to Do Now

2. Welcome and Introduction
• Welcome
• Today’s subject: SEC’s new enhanced
disclosure rules and what companies, Boards
and Compensation Committees need to do now
– Review of rule changes
– Provide practical analysis of how to comply:
analysis and disclosure

3. New Rules Are Effective on
February 28
• Proposed rules were issued in July 2009
• New rules are generally effective as of February 28, 2010
– Apply to definitive proxy statements and 10-Ks filed after that date
– Except for companies with FY end before December 20, 2009
• Preliminary proxy filings before Feb. 28 must include disclosure if
it is expected that the definitive will be filed after Feb. 28
• Registration statements for non-reporting companies filed after
December 20, 2009 must comply in order to be declared
effective on or after Feb. 28

4. Disclosure Drives Behavior
• Compensation and governance under the microscope
• Underlying philosophy: Sunlight is the best
disinfectant
• Likely intended to affect substantive policies
• Designed to advance shareholder empowerment
trend

5. Federal Policymakers Take Control of the
Governance Agenda in 2008-09
• Government takes equity stakes in Citigroup, GM, GMAC, AIG,
Bank of America, Chrysler
• Intense focus on executive compensation
– TARP firms hold mandatory Say on Pay votes
– Pay Czar cuts pay for executives at top TARP firms, an
average of 50%
– Legislation to require Say on Pay votes
• SEC proposes new proxy access rule
• SEC and NYSE eliminate broker discretionary voting

6. Legislative Developments
• Senator Schumer’s “Shareholder Bill of Rights”
– Would direct SEC to establish proxy access
– Would also make other fundamental changes in corporate
governance—declassification, mandatory independent chair
– Mandatory Say on Pay votes
• Similar bill by Rep. Gary Peters
• Senator Dodd’s Financial Reform Bill
– Covers majority voting, declassification, proxy access,
independent chairman, clawbacks, Say on Pay, golden
parachutes, and independent consultants and counsel

7. Topics
• Analyzing and disclosing pay risk
• Revised equity grant disclosure
• New disclosure regarding compensation consultant
services and fees
• New disclosure regarding corporate governance
• Questions/Answers

8. Pay Risk: A Practical Approach
to Analysis and Disclosure
Pay Risk: A Practical
Approach to Analysis and
Disclosure

9. Pay Risk: A Practical Approach to
Analysis and Disclosure
• What triggers disclosure under the new
rules?
• What information must be disclosed?
• Policies that may mitigate or balance
incentives
• Steps to take now

10. What Triggers Disclosure?
• Disclosure is required where “risks arising
from the registrant’s compensation policies
and practices for its employees are
reasonably likely to have a material adverse
effect on the registrant”
• Applies to compensation policies and
practices for all employees, not just
executives

11. What Triggers Disclosure?: Examples
• The trigger is designed to be principle-based, varying
based on facts and circumstances, but the final rules
include a non-exclusive list of examples where
disclosure may be triggered:
– Compensation policies and practices at a business unit that
either (1) carries a significant portion of the company’s risk
profile, (2) has a significantly different compensation structure
than other units; (3) is significantly more profitable that other
units; or (4) pays compensation expense as a significant
percentage of the unit’s revenues
– Compensation policies and practices at a company vary
significantly from the company’s overall risk and reward
structure (e.g., where bonuses are awarded based on
performance while the related income and risk to the
company are spread over a significantly longer period of
time)

12. What Information Must Be Disclosed?
• The disclosure will be located in a separate section of
the proxy, rather than as part of the CD&A
• If disclosure is not triggered, the rules do not require a
company to state affirmatively that is has made a
determination that its compensation practices and
policies are not reasonably likely to have a material
adverse effect on the company
• If disclosure is triggered, a company must “discuss the
registrant’s policies and practices of compensating its
employees, including non-executive officers, as they
related to risk management and risk-taking incentives.”

13. What Information Must Be Disclosed?
(continued)
• Principles-based rule, but the final rules include
examples of issues companies may need to address
if disclosure is required:
– General compensation policy design philosophy;
– Method for conducting risk assessment;
– Use of “clawbacks” and holding periods;
– Adjustment process to address changes in risk
profile;
– Compensation policy changes relating to changes
in the company's risk profile; and
– Monitoring of compensation policies.

14. Policies That May Mitigate or Balance
Incentives
• Policies or practices that mitigate or balance incentives may be considered in
determining whether compensation practices are “reasonably likely to have a
material adverse effect” on the company
• Appropriate Performance Metrics:
• Balance financial vs. non-financial goals and individual vs. company-wide
goals;
• Vary goals applicable to long- and short-term awards;
• Implement longer-term performance objectives and vesting conditions;
• Increase the range of performance over which incentives are paid.
• Appropriate Pay Mix:
• Create a balance of short-term and long-term incentives, cash and equity
incentives and incentive compensation vs. base pay.
• Limited Non-Performance Payouts:
• Limit the size of sign-on bonuses and other payouts that do not reflect
performance;
• Limit severance and change-in-control payouts to avoid perverse incentives.

15. Policies That May Mitigate or Balance
Incentives (continued)
• Appropriate Equity Incentives:
• Balance grants of options/SARs and stock awards;
• Limit the size of equity grants;
• Implement longer vesting periods;
• Implement stock ownership and holding guidelines that link executive and
shareholder interests.
• Compensation Consultant: Engage a compensation consultant to assess
compensation policies and compare these policies to those of peers and of the
broader industry.
• Deferred Payments: Defer annual incentive awards and build-in permissible
adjustments based on subsequent results or discoveries.
• Remedial Measures: Reserve availability of “clawbacks,” payout caps and
discretion to adjust awards, including in connection with extraordinary or
unanticipated company events.
• Positive Company Culture: Encourage emphasis on long-term value creation.

16. Steps to Take Now
• Assess Risk Policies. Review existing risk management
policies, determine if broader or more detailed policies are
needed and implement as appropriate.
• Assess Risk Profile. Identify components of the company’s
known risk profile that may be impacted by compensation
decisions and confirm that compensation policies mitigate rather
than exacerbate these risk factors.
• Coordinate Oversight. Harmonize functions of audit and
compensation committees and ensure that controls are in place
to verify attainment of performance goals. Confirm that risk
managers are not compensated based on the performance of the
units they oversee.

17. Steps to Take Now (continued)
• Revisit Compensation Programs. Review compensation
agreements, plans and programs to ensure that incentives
encourage desirable behavior linked to long-term value.
• Revise Compensation Policies. Revise compensation
agreements, plans and programs as needed to ensure that they
provide proper incentives.
• Document Risk Assessment Process. Describe steps
taken to assess risk and implement risk-monitoring and
mitigating procedures.

18. Enhanced Equity Award
Disclosure
Enhanced Equity Award
Disclosure

19. Enhanced Equity Award Disclosure
• Companies must now report equity awards at
aggregate grant date fair value (in accordance with
FASB ASC Topic 718) on the Summary
Compensation Table and Director Compensation
Table
• Disclosure is required for awards granted during the
fiscal year (rather than grants based on services
performed during the fiscal year, even if granted after
fiscal year end)
– The SEC suggests that post-fiscal year end
awards be analyzed in the CD&A

20. Enhanced Equity Award Disclosure
(continued)
• The new rule may affect who is a named executive officer
• The value of performance-based awards must be reported based
on the probable outcome of the performance conditions, as of
the grant date
– The maximum possible value of awards must be reported in a
footnote
• The SEC’s proposed changes eliminating the reporting of full
grant date fair value in the Grants of Plan-Based Awards Table
were not adopted in the final rules
• Companies must re-calculate awards on a grant date fair value
basis for current named executive officers for 2008 and 2007, but
companies are not required to re-compute who would have been
a named executive officer in those prior years

21. Enhanced Compensation
Consultant Disclosure
Enhanced Compensation
Consultant Disclosure

22. Enhanced Compensation Consultant
Disclosure
• Board compensation consultants
• Company compensation consultants
• Exempt services

23. Board Compensation Consultants
• Disclosure is triggered if the board (or compensation
committee) engages a consultant (or an affiliate) who
provides:
– (1) advice on the amount or form of executive and/or director
compensation, and
– (2) non-executive compensation consulting services for fees
in excess of $120,000 annually
• If triggered, the company must disclose:
– Aggregate fees paid for compensation and non-
compensation consulting services
– Whether the decision to engage the consultant for non-
compensation services was made or recommended by
management
– Whether the board approved the non-compensation services

24. Company Compensation Consultants
• Disclosure is triggered if the board (or compensation committee) has not
engaged its own consultant, and the company engages a consultant (or
an affiliate) who provides:
– (1) advice on the amount or form of executive and/or director compensation,
and
– (2) non-executive compensation consulting services for fees in excess of
$120,000 annually
• Disclosure is not required with respect to the company’s consultant
where the board and management have separate compensation
consultants, regardless of whether the management consultant
participates in board meetings
– Disclosure may still be triggered with respect to the board’s consultant if the
conditions for disclosure are met
• If triggered, the company must disclose:
– Aggregate fees paid for compensation and non-compensation consulting
services

25. Exempt Services
• Disclosure is not required where:
– The consultant’s only role in consulting on
compensation is related to broad-based plans that
do not discriminate in favor of executives or
directors of the company
– The consultant’s services are limited to providing
information that is not customized to the company
or is customized based on parameters not
developed by the consultant (e.g., survey data)
• However, the consultant may not provide advice or
recommendations in connection with the information
provided

26. Disclosure About
Board Leadership Structure

27. Trends in Board Leadership Structure
• Enron, WorldCom, SOX and the aftermath
– Audit committees must consist only of independent directors
– Listed company boards required to have a majority of
independent directors
– Boards to meet in regularly scheduled executive session
without management
– Certain mutual funds must have independent chair
• Financial crisis leads to high profile CEO departures,
and separation of Chair and CEO roles
– Major financial firms, such as Citigroup, Bear Stearns,
Washington Mutual, Wachovia and Wells Fargo split the
Chair and CEO roles
– Stockholders strip Bank of America CEO Ken Lewis of his
Chairman title

28. Trends in Board Leadership Structure
(continued)
• In 2008, NACD study: 73% of directors on boards with
independent chair said company greatly benefited;
7% said not
• In 1998, 16% of S&P 500 companies had non-
executive chairmen
• By 2008, 39% had non-executive chairs
– 45% at S&P 1500
• However, most non-executive chairs are not
completely independent (usually former CEO or other
related party
– According to Spencer Stuart, in 2004, 7.6% of all non-
executive chairmen were designated as independent, rising
to 13% in 2007 and 16% in 2008

29. 14a-8 Stockholder Proposals
• Before 2009, most stockholder proposals sought a
lead independent director
– In the 2009 proxy season, there was fault line shift from proposals
for lead independent directors to proposals for separate
independent board chairs
• In 2009, 43 proposals sought independent chairs vs.
34 in 2008
– Support is also up: 35% in 2009 vs. 28% in 2008
– Approximately 45% of S&P 1500 have already separated the CEO
and board chairs
– RiskMetrics and other proxy advisory firms will recommend in favor
of separation proposal, with limited exceptions
• Political and regulatory support
– Pending legislation would mandate independent board chair
– SEC proposed disclosure rules would focus disclosure on this issue

30. New SEC Disclosure Rules about
Board Leadership Structure
• New rules mandate disclosure of
– whether and why it has chosen to combine or
separate the Chairman and CEO positions
– why company has determined its leadership
structure is appropriate given its specific
characteristics or circumstances.
• If Chairman and CEO positions are not split, more
disclosure is required:
– Disclosure as to whether or not registrant has a
lead independent director, and
– Disclosure of the specific leadership role of lead
independent director

31. Company Must Make A “Determination” that
Board Leadership Structure is “Appropriate”
• A “determination” should lead to actual and
meaningful board deliberation and discussion
• SEC has not provided guidance about what
“appropriate” means in this context
• Of course, board discussion on these topics may
suggest ways to improve leadership structure and
board function

32. The New Default Structure?
• The SEC’s presumption appears to be that a
split Chairman and CEO is, in general, a more
appropriate leadership structure
– Potential for inherent conflict of interest;
board is to act independently of the CEO
– Effective chair of a public company board
involves substantial duties that are
inconsistent with a full-time job managing
the company

33. Structure “Appropriate Given the Company’s
Specific Characteristics and Circumstances”
• What specific characteristics and circumstances might make a
combined Chairman/CEO appropriate?
– It ain’t broke
– Confusion, duplication, inefficiency, and cost
– Disruptive to strip CEO of his Chairman title; separation
should be done as part of succession
– Controlled companies
– Chairman temporarily assumes CEO role
• What specific characteristics and circumstances might make it
appropriate to have a combined Chairman/CEO and no lead
independent director?
• Disclosure will change behavior
• Analogy to SOX disclosure regarding absence of financial
experts

34. Enhanced Director and Nominee
Disclosure

35. Disclose Qualifications of Directors and
Nominees
• Company to briefly discuss, for each director or
nominee:
– specific experience, qualifications, attributes or
skills
– that led the Board to conclude that the person
should serve as a director
– at time disclosure is made
– in light of registrant’s business and structure
• Regarding board service, not committee service,
unless expertise qualifying individual for a committee
is the reason for nomination to the board

36. Expanded Disclosure of Directorships and
Legal Proceedings
Expanded biographical information shall include:
• All public company directorships held in past five years
– This is designed to reveal past board experience, and
professional or financial relationships that might pose
potential conflicts of interest
• Legal proceedings over previous ten years, instead of five years
• Disclosable legal proceedings expanded to include:
– Judicial or administrative orders, judgments or findings
alleging violations of
• Securities law or regulations, or commodities laws
• Laws regarding financial institutions or insurance
companies
• Mail or wire fraud, or fraud related to a business entity
• Excludes settlements of private civil litigation
– Disciplinary sanctions or orders imposed by a stock,
commodities or derivatives exchange or other SRO

37. Director Diversity
Disclosure of the Nominating Committee’s process for
identifying and evaluating nominees must address:
• Whether, and if so, how, the nominating
committee (or board) considers diversity in
identifying nominees for director; and
• If the nominating committee (or the board) has a
policy with respect to the consideration of
diversity
– Describe how the policy is implemented; and
– How the nominating committee (or the
board) assesses the effectiveness of its
policies.

38. Definition of Diversity
• Companies are free to define as they consider
appropriate
• A definition of diversity can include differences
of:
– Viewpoint
– Professional experience
– Skill
– Other individual qualities or attributes that
contribute to board heterogeneity.
• Need not be limited to concepts of race,
gender and national origin

39. Disclosure of the Board’s Role in Risk
Oversight

40. New SEC Disclosure Rules Focus on
the Board’s Role in Risk Oversight
Proxy and Information Statements must disclose:
– The extent of the board’s role in risk oversight
• How does the board administer its oversight function
– The effect that the Board’s role has on the board leadership
structure.

41. The Board’s Risk Oversight Process
• How does the board use its board committees in
administering it risk oversight?
• What role does the full board play?
• How does the board, or board committee, receive
information on risk and risk management from
management?
• Should a standing risk committee be formed?
• How much of this should you disclose?

42. 8-K Reporting of Voting Results

43. 8-K Reporting of Voting Results
• Voting results must be reported within 4
business days after the meeting
• If result is not known (matter is
contested, or too close to call), file
preliminary results in 4 business days,
and final within 4 business days after
results are known
• Failure to file within required time period
can affect S-3 eligibility

44. Questions and Comments?

45. Speakers
John M. Newell, Latham & Watkins, Partner,
Corporate Department (San Francisco)
+1.415.395.8034 ⎜ john.newell@lw.com
David M. Taub, Latham & Watkins, Partner,
Tax Department (Los Angeles)
+1.213.891.8342 ⎜ david.taub@lw.com

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arise in any specific instance. You should not, nor are you
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