Image by Kevin Phillips from Pixabay

Spoiler alert – despite the title and the creepy photo, this is not about zombies, vampires, or anything else of a spooky nature.  Rather, it’s how we can hopefully make some of the deadwood in our proxy statements meaningful.

I realize that the upcoming proxy season already poses a bunch of challenges; just thinking about the SEC’s over-the-top rules on pay versus performance alone could bring on a couple of migraines.

However, a recent article on SEC comment letters to some major companies reminded me that we also face challenges associated with long-standing, important disclosures that tend to be ignored once they’ve been drafted, no matter how much time has passed.  For example, the SEC comments referred to in the article asked companies to do a better job explaining how their boards oversee risks.  What is the timeframe over which you evaluate risks?  Does the board use outside advisors to help them think about the unthinkable?  How does the risk oversight process align with disclosure controls?  Another area of comment related to board leadership: What exactly is the role of the board chair (or lead independent director)?  Does he or she represent the board in communications with shareholders?  Are there circumstances in which he/she could override the CEO on risk matters?  Are there circumstances in which the board would separate (or combine) the positions of board chair and CEO?  And so on.

As noted, I view these as important disclosures.  Sure, when the rules were changed a dozen or so years ago to require these disclosures, we thought they were pains in the neck (or other parts of our anatomy); we reviewed many companies’ proxy statements to see how they handled the issues; we may have agonized a bit about what to say; and then we more or less forgot about the disclosure, other than the occasional tweak in subsequent years.  You are free to disagree, but I think we owe it to our shareholders, if not to ourselves, to make these disclosures meaningful.

Now that I’ve gotten that off my chest, I want to focus on one particular set of disclosures that consistently disappoint me – specifically, the so-called “director skill set” disclosure called for by Item 401(e) of SEC Regulation S-K.  For those of you who haven’t committed all of Reg S-K to memory, the requirement is as follows:

“[F]or each director or person nominated or chosen to become a director, briefly discuss the specific experience, qualifications, attributes or skills that led to the conclusion that the person should serve as a director” 

Again, when this requirement was first instituted, many of us groaned.  We looked at a bunch of so-called leading companies’ proxy statements and debated pithy topics like whether we should provide this skill set disclosure in narrative, full-sentence form or the radical bullet-point approach.  Really.  And then, whatever we decided to do, we’ve tended to stick with it ever since.

At the time, I made the following two suggestions to my then employer:

  • For at least some directors – say, the board chair and the chairs of the board committees – do a little video clip in which each would explain what she/he contributed to the board. Embed a link to the video in the proxy statement; after all, if a picture is worth a thousand words, a video would be a multiple of that.  This suggestion was greeted with groans – we’d have to draft scripts, fit video shoots into already complex schedules, etc.  And it wouldn’t be cheap. OK, I figured that would be a losing proposition.
  • A less technical approach would be to ask each director to draft a sentence or three that we could then edit and include in the proxy statement, all in the first person. I actually thought this was reasonable, but if the first suggestion elicited groans, this one was met with outright derision.  I believe my (least) favorite response was “What? We can’t ask our board members to do that!”  To this day, it seems to me that when you’re paying someone hundreds of thousands of dollars a year and putting your company in his/her charge, asking him/her to draft a sentence or three wasn’t such a big deal.

And so it went, and so it goes.  I still don’t think either idea is bad, and I still see the same tired, old language in most proxy statements.  In some cases, the language has been supplemented or replaced with graphics that range from harmless to incomprehensible, but no one seems to care (presumably including the SEC, which didn’t raise the subject in that recent spate of comment letters).

That said, I’m really not wedded to either of these approaches or to any particular approach.  What I do think was best expressed by one of my favorite people on the institutional investor side of the discussion, who once told me that companies need to explain why each member of board is better than having an empty seat at the board table.  It seems to me that that is a reasonable goal and one towards which we should all strive.