SPEAKING OUT

January 26, 2004

Posted, with permission, from the current issue of The Corporate Counsel.

An Open Letter To The SEC (And Our Colleagues)

With all the changes in compensation practices over the past several years, as well as increased public focus and concern over compensation excesses, it is time for me to speak out. I have been increasingly frustrated that the Staff/Commission seems resigned to adhering to the snailish rulemaking process in responding. I love the SEC and truly believe (from my experiences—both on the Staff years ago and from my perspective and interactions with the Staff over the past 34 years as a practitioner and someone who is not afraid to be vocal) that the caliber and commitment of the Staff of the SEC is heads and shoulders above any other government agency.

At times, however, we all must adjust to exigencies. Our preference in today’s world is for the Staff/ Commission to get guidance out in whatever way works (e.g., at major conferences, in FAQs, or the Staff’s long-dormant Telephone Interpretations Manual or Current Issues Outline, or the Commission "Statement" technique used a few years ago with MD&A). The Staff cannot do it alone, however. Each of us, in our capacities as counselors and advisors to companies and boards, must do our part in standing up for what is right.

A Few Immediate Suggestions

This coming proxy season more than ever, we urge companies to get out ahead of the (outdated) disclosure rules relating to executive compensation and compensation plan proposals. And, we urge the Staff to make a difference this proxy season by using its pulpit now to, for example:

Make it clear that the SEC will no longer tolerate the boilerplate that Compensation Committee Reports have turned into. Among the items we suggest that compensation committee reports address:

(i) who hires the company’s compensation consultant and whether the consultant reports to the board or management;

(ii) whether the committee has, in fact, made a calculation of the total compensation that the NEOs are receiving (including perks, deferred compensation and retirement benefits—each of which is currently inadequately disclosed even to compensation committees and may yield surprisingly huge numbers). [Hopefully, the Staff/Commission will urge that the report include a detailed statement that the committee has reviewed and approved each of the components (including reimbursed and company paid expenses, loans, forgivenesses or modifications of repayment obligations or earnings targets, acceleration of payouts, etc.) and determined the total amount not to be excessive.] Unfortunately, many boards still have not yet focused on this and have not even made the total calculation.

More To Come

We don’t pretend to have all the answers for righting and reversing the excesses that have caused so many executives and compensation committees (and their advisors) to go along with amounts and practices that have gone beyond their core values and ethics. We ask our readers to submit to us specific suggestions for proxy statement and other fixes that will get us all back on track. We will list the best (respecting anonymity) in our upcoming issues to keep the ball rolling.

— Jesse M. Brill