from Third Quarter 2010
Corporate Board Member
by John Greenwald
Mark A. Borges, 56, is hot stuff on the Web. His Proxy Disclosure Blog attracts thousands of subscribers, all anxious for his take on such things as how well companies describe the details of their executive compensation plans in their proxies. Lately he’s been focusing on the transparency with which boards assess possible links between pay incentives and corporate risk, something they’re required to do under new rules set by the Securities and Exchange Commission.
Borges, an attorney and author whose books include SEC Executive Compensation Disclosure Rules, published by the American Bar Association, combs through 15 to 20 proxy statements a day, looking for examples of transparent disclosure. He posts his findings at CompensationStandards.com, a Web portal owned by the digital publisher Executive Press Inc. in Concord, California. Annual subscriptions range from $725 for single-user access to $2,995 for a company and any or all of its employees.
“I think the SEC’s objective is twofold,” Borges says of the agency’s new rules. “It wants to ensure widespread compliance with these requirements, and it wants to see how companies are responding so it can create a baseline for future years.” Borges may have more credibility than some in reading the SEC’s mind. He spent four years as a special counsel in the agency’s office of rulemaking in the corporate finance division, leaving to join the Mercer consulting firm in 2003. In 2007 he became a principal at Compensia Inc., a compensation consultant in Corte Madera, California.
While the SEC provides a general framework for compliance, there is no set of standards for different companies to follow. “No company has the benefit of seeing what everyone else is doing,” says Borges. “So I try to highlight risk disclosures that I’ve seen and liked, and hopefully provide a database to show how other boards are tackling similar issues.”
Borges advises boards to conduct periodic compensation-related risk assessments and to describe who is involved in that process. Good disclosures, he says, also tell how companies monitor and manage such risks. “Of course, this assumes that the company didn’t identify any compensation-related risks that would be reasonably likely to have a material adverse effect on the business,” Borges adds. When those risks do exist, he says, boards should disclose them, as well as the steps that have already been taken or are under way to correct them.
In his view, much of what the SEC is calling for amounts to prudent common sense. “I would imagine that any director would know that if you’re putting together a bonus plan, you need to limit it as a cost precaution,” he notes. “Yet look at AIG”—a reference to American International Group. “It was paying traders on their volume of trades, and it didn’t matter if they blew up.” Boards are now expected to forestall such practices. “What’s different now is that the SEC has required companies to implement a formal process” for considering pay-related risks, Borges says. “The key is to give investors a picture of what boards are doing to stay on top of this.”
Nobody expects boards to develop strategies that are entirely risk-free. “If you’re trying to grow the business, you’re going to ask executives to push beyond modest returns,” says Borges. “What directors need to have are processes that help them manage compensation risk within tolerable levels.” Investors want this information, even in cases where pay incentives pose no apparent risks, he says: “In the first year especially, it benefits you to be a little bit more explicit.
Presumably, if you establish a strong baseline it will keep things in check.” And keep your board from becoming a poster child for compensation policies that prompt officers and employees to run amok.
Related Article:
Getting Proxy Transparency Right
topic tags: board of directors, compensation, corporate governance