As clear as mud

It’s a big moment for the SEC’s hammering home the message about improving disclosure. In lengthy releases, prominent public speaking events and comment letters, the agency and its leaders are saying they are still not satisfied with what is being produced under the new rules for executive compensation disclosure.

Corporation finance director John White says public companies have made progress since his predecessor Alan Beller’s memorable pronouncement three years ago that ‘all means all’ when it comes to reporting. But White adds that if he could have his own catch phrase, it would be, ‘Where’s the analysis?’

His comments come at a time when the SEC has released its own observations and comments after an initial review of the filings of 350 companies under the new rules that went into effect in November 2006. Often still absent, the agency says, is analysis of the decision-making process underlying pay figures.

There are pretty clear rules of what companies need to disclose and what needs to be quantified. What is being reported in new tables and footnotes is giving a more detailed picture than ever on how executives are paid. Yet the SEC says it would like to see more discussion of how companies arrive at particular levels and forms of compensation and why they pay that compensation in order to give investors an analysis of the results of their compensation decisions.

In a speech at a proxy disclosure conference in San Francisco, White had a suggestion for improving the next round of compensation disclosure and analysis (CD&A) in the 2008 proxy season: ‘Ask every key participant (from the compensation committee chair on down) to turn in one page — no more than one page — perhaps even with the caption ‘analysis.’ Hand them a copy of our just-issued staff report so that they see our concerns about missing analysis. Then ask for bullets [reflecting] what he or she sees… as the key hows and whys.’

‘Build it into your procedures,’ he continued. ‘Keep asking for them.’

A particular stumbling block is on performance targets, an area for which the SEC says it has issued more comment letters than any other disclosure topic in its review of the first 350 companies. In its observations, the regulator says it was often difficult to understand how companies used performance targets or considered qualitative individual performance to set compensation policies and make compensation decisions. In making the comments, the corporation finance staff said they ‘did not seek to require companies to defend what may properly be subjective assessments,’ but rather wanted companies to ‘clearly lay out the way that qualitative inputs are ultimately translated into objective pay determinations.’

Among its clarifications, the SEC says it now wants companies to name specific competitors it uses to benchmark pay as well as more information on the CEO’s role in setting his or her own pay.

Trash heap

The point to all this back and forth is that the SEC is trying to move disclosure beyond being a data dump into something that actually serves investors. Sometimes, it can seem like a futile exercise. In recent keynote speech at a summit at the Center for Plain Language in Washington, DC, SEC chairman Christopher Cox said his sense is proxy material and other filings, which are often bogged down by ‘legalese and jargon,’ go unread: ‘We have empirical evidence that in fact, most retail investors are throwing away the disclosure documents that the SEC requires, rather than reading them.’

His overall message, which has been pushed before, was that plainer writing would improve transparency. Yet companies are still struggling to achieve a balance between good communication and adequate disclosure.

To get a feel for what is happening, Cox said the SEC’s newly expanded Office of Investor Education and Advocacy would be conducting a baseline survey of investors asking whether they read proxy statements, 10Ks, 10Qs and other required disclosure. The effort will be headed by Kristin Kaepplein, the new division director who joins the SEC from a position as vice president of global compliance operations at Goldman Sachs.

SEC spokesman John Nester said that the survey plan was ‘still in its formative stages’ with the timeline, methodology and topics to be determined. But Cox did say in his speech that the SEC would ask investors whether they spend more than three minutes reading a proxy statement or just throw it away. ‘Periodically, we will go back into the field and ask that question again,’ he said. ‘Over time, we will want to see a decline in the percentage of investors who routinely put SEC documents into the trash.’

A model proxy

A recent effort by Pfizer to write model disclosure has not gone smoothly. The company has been praised for its good intentions, but the stumbling blocks it hit point up the struggle between writing something that’s readable and that meets regulatory requirements.

Peggy Foran, Pfizer’s corporate secretary, joined with communications consultant William Lutz and Addison designer Gordon Akwera to rework the executive compensation section of the company’s 2006 proxy statement for the 2007 proxy season. It was an SEC-encouraged project to produce a kind of model statement. Among the changes were reorganizing and color-coding important sections, turning some paragraphs into bullet points, creating a new summary compensation table and adding photos of executives to a salary chart.

‘The idea was to explore ways to make the statement more readable and more understandable,’ says Lutz, who spearheaded a movement to improve mutual fund prospectuses. ‘We used both plain language and information design.’

When the SEC’s corporation finance staff reviewed the document, it hit snags, with some officials stating it was unready to be held out as a model. Lutz says the problem stems from miscommunication: ‘I thought the SEC would comment on the design, layout, and plain language in the statement. The SEC thought they were reviewing it for compliance. Since what we submitted was a first draft, we knew it wasn’t in compliance, especially since we had not followed the regulations on the ordering of information. We were looking for a reaction to the somewhat radical design approach we took.’

The New York Times reported the effort as a major gaffe, noting that unnamed SEC officials asked Pfizer to blur the text at a public unveiling so that it couldn’t be used as reference for others.  Lutz takes big issue with the Times reporting it as a ‘setback’ for Pfizer: ‘As we repeatedly said, it is a concept document and was not intended to be ready for filing.’

For now, the fate of the model document is uncertain. ‘The future of the project lies with Pfizer and the SEC,’ Lutz says.

Push back

In any case, while Pfizer is trying hard to meet the needs of regulators, other companies are hinting that they think the SEC is demanding a bit too much. The Wall Street Journal recently reported that some companies are thinking of banding together to lobby against certain aspects of the latest round of executive compensation reporting requests.