The New Enhanced Proxy Disclosure Rules – Ready, Set, Change and NOW

The SEC’s new enhanced proxy disclosure rules, requiring disclosure concerning (1) board leadership structure and qualifications, (2) risk and risk oversight and (3) compensation issues, were adopted in response to “investors’ . . . increasing[] focus[] on corporate accountability” in the wake of the financial crisis. But almost as important as the substance of the rules, well documented elsewhere, are the underpinnings of the new requirements – the SEC’s un- or understated objectives in promulgating the new rules. In order to assure compliance with both the letter and the spirit of the rules, practitioners should be mindful of the repeatedly denied but fairly obvious governance “best practices” agenda that animates the rule making. Moreover, although the disclosures may not be required until your next proxy statement, the disclosure requirements assume that a process has occurred which can then be described. Accordingly, reassessment and reaffirmance and/or change of the targeted governance policies and practices cannot start too soon.

First, there can be no serious doubt that the rules reflect an expectation that boards will re-examine and in many cases improve their corporate governance policies and practices. In this respect, the new rules are the latest installment in what some characterize as the Commission’s ongoing effort to regulate corporate governance by the imposition of targeted disclosure obligations, despite the fact that the SEC lacks a clear mandate to regulate corporate governance (and denies any such intent), an area traditionally the province of state law’s more laissez-faire approach.

While the SEC disclaims any intent to “influence” or “steer” any particular governance structure or policy, insisting it is sticking to its disclosure mandate, the commentary in the Adopting Release itself belies the claimed neutrality. Eighty pages in, (in case you don’t get that far) the Adopting Release acknowledges that “[t]he new disclosure may” have the “benefit” of “also encourag[ing] the board and senior management to examine and improve” governance policies and structures.

Second, the new rules are also the latest installment in the Commission’s ongoing effort to push companies to provide more “analysis” and not just “discussion” in their disclosures. In other words, once the board examines and evaluates and potentially changes its governance structures, or decides not to, the staff expects that the disclosure will explain not just “what” the board decided, or “what” process it employed, but “why” it decided as it did.

In crafting the new disclosures, practitioners ignore these expectations at their peril. While the SEC cannot mandate a particular governance process or policy (as it recognizes throughout the Adopting Release), the new rules certainly will require boards (1) to reconsider and re-evaluate existing policies and practices (or the lack thereof) targeted by the disclosure rules and (2) decide whether changes are necessary, and (3) whether changes are made or not, explain the reasons “why.” An unexamined process, an unexplained decision concerning governance matters covered by the rules, a failure to provide detail or the drafting of boilerplate will not suffice.

This article will first further establish and assess the coercive (not necessarily in a bad way) effect (for better or worse) of the disclosure requirements in pushing companies to examine and perhaps change their governance policies. Having then established that the SEC expects a deliberative process examining governance policy sufficient to enable the company to provide a reasonably detailed description of “why” the board reached its governance decisions, (not just “what” the decisions are), the article will then (1) explore possible reasons that it’s difficult (or undesirable) to explain “why” and (2) conclude with a “how to” section providing some strategies for facilitating board deliberations and drafting compliant disclosure that provides a better sense of “why” the company’s governance decisions, policies and procedures – whatever they are – are what they are.

Governance Regulation Through the Backdoor of Disclosure?

Notwithstanding the repeated disclaimers of any intent to “influence” or “drive” behavior or governance policies, it is plain that the SEC hopes that its new disclosure requirements (again, all that the SEC can really regulate) will have the side benefit of prompting better governance and decision-making. While the SEC repeatedly states that the new rules are not intended to mandate any particular governance regime, some of the commentary in the Adopting Release expresses clear preferences for policies that approximate best practices. This professed neutrality yet obvious policy preference is evident with respect to each element of the new disclosure.

Board Leadership Structure

• The Adopting Release states that the new rules are
  

  “intended to provide investors with more transparency about the company’s corporate governance, but are not intended to influence a company’s decision regarding its board leadership structure.”

• The Release later concedes:
  

  “Although the amendments are not intended to drive behavior, there may be possible benefits if a company re-evaluates its leadership structure or the board’s role in risk oversight and decides to make changes as a result.

Executive Compensation

• The Adopting Release states that
  

  “the amendments are not intended to steer behavior” but only to make “changes in the way that executive compensation is represented….”

• The Adopting Release later concedes that
  

  “changes in the way that executive compensation is represented . . . and other new, compensation-related disclosures may indirectly lead boards to reconsider pay structure, potentially changing the amount of pay in some cases.”

• The Release further predicts that
  

  “[t]he new disclosure may also encourage the board and senior management to examine and improve incentive structures for management and employees of the company.

• The Release concludes that
  

  “These benefits [e.g., improved incentive structures] may also lead to increased value to investors.”

Diversity Policy

The disclaimers concerning the lack of intent to influence diversity policy are followed by a particularly pointed (and extended) discussion of why a diversity policy is such a good thing:

• The Adopting Release’s discussion of diversity policy disclosure, also starts with the formulaic
  

  “[a]lthough the amendments are not intended to steer behavior…”

• The Adopting Release then points out the myriad benefits of
  adopting a diversity policy including that

  “[D]iversity policy disclosure may also induce beneficial changes in board composition.”

  “A board may determine, in connection with preparing its disclosure, that it is beneficial to disclose and follow a policy of seeking diversity.”

  “[A] diversity policy may encourage boards to conduct broader director searches, evaluating a wider range of candidates and potentially improving board quality.”

  “To the extent that boards branch out from the set of candidates they would ordinarily consider, they may nominate directors who have fewer existing ties to the board or management and are, consequently, more independent.”

  “To the extent that a more independent board is desirable at a particular company, the resulting increase in board independence could potentially improve governance.”

  “In addition, in some companies a policy of increasing board diversity may also improve the board’s decision- making process by encouraging consideration of a broader range of views.”

It strains credulity that this testimonial in favor of diversity policies, and the other positive statements about best practices included in the Adopting Release does not express a policy preference. While the Adopting Release purports to be policy-neutral the expressed “benefit” of “potential change” and “improvement” reads as if it is drawn from a best-practices good governance manual.

The objections to the rule making, particularly with respect to diversity policy underscore the governance-policy-through-the-back-door-of-disclosure point. Thus, Commissioner Casey, echoing concerns of many commenters, worried that aspects of the new rules, specifically the “director qualification” and “diversity” disclosure rules were coercive and “encroach[ed] on the decision making authority of boards of directors,” “unduly intruded into boards’ decision making process,” and, in some respects, actually “undercut[] investor understanding of how companies compose their boards.” The objections are further evidence that these new governance disclosure rules will require reassessment and explanation of governance practices and not just a description of the policies and practices already in place.

In reality, however, the new rules are not materially more coercive than other SEC disclosure rules, particularly those that came out of Sarbanes-Oxley or even the recent CD&A pronouncements. All disclosure rules are premised on the idea that “sunlight is the best disinfectant.” If forced to look at governance issues (the financial expertise of audit committee members under SOX, for example), companies whose policies significantly diverge from best practices may consider making changes before making disclosure. That’s how all disclosure rules work – by assuming that issuers would rather “shape up” than confess to practices and policies that fall far short of “best.” There is the expectation (if not the empirical proof) that moving towards best practices will potentially improve board governance and decision making, including by helping to prevent ill-considered or unconsidered decisions from being made (by an audit committee member with no financial expertise, a compensation committee that does not have truly independent consultants, by a board whose membership is not diverse by any definition). Not a neutral rule making process. But not a particularly revolutionary one since most companies are already moving in the direction of best practices. And in no event an out-of-the-ordinary rulemaking process by any stretch.

Like it or not, however, it is clear that the governance-through-the-backdoor of disclosure regulation comments are valid. It is also clear that disclosure under the new rules that is not proceeded by an examined and considered review of those aspects of governance targeted by the new rules will not fly. Nor, as discussed below, will any boilerplate, generalized discussion of the board’s decision and decision making comply.

Instead, the disclosure must explain “what” and “how” in some detail, but more importantly, must get to the “why.”

Tell Me “Why” – Or “More ‘A” and Less ‘D”

The SEC staff has made plain that it expects companies to explain in some detail the governance decisions targeted by the new disclosure rules — whether any policy changes are made or not. The Staff has advised boards and their advisors to heed the not-so-positive feed back with respect to the lack of “A” and the fact of too much “D” in registrants’ CD&A disclosures. In that context, the SEC staff has lamented that “far too many companies continue to describe — in exhaustive detail — the framework in which they made the compensation decision, rather than the decision itself. The result is that the “how” and the “why” get lost in all the detail.”

As the deputy director of the Division of Corporate Finance admonished:

A company’s analysis of its . . . decisions should present shareholders with meaningful insight into its . . . policies and decisions, including the reasons behind them. Where analysis is lacking, shareholders are often left with a pages-long discussion that is heavy on process but does not explain the reasons why.

The staff has stated that the “reasons why” analysis describing why boards have made certain governance decisions will also be a central focus with respect to the disclosure required by the new rules. The Adopting Release also makes clear that generalization and generic disclosure will not be acceptable, emphasizing that “companies must assess the information . . . in light of the company’s particular situation. Thus, for example, we would not expect to see generic or boilerplate disclosure that [policies] are designed to have a positive effect, or . . . may not be sufficient to [achieve some general corporate purpose].”

What is of concern to the SEC staff is that for whatever reason, issuers and their advisors tend to focus on implementing and then describing structures and frameworks and constructs with the intercession of committees and experts and formulistic process, all in an effort to show that the “how” part was very deliberate and well thought out. That’s all good (but quite often, as the SEC lamented, overdone) but it still doesn’t get to the “why”.

If all that is disclosed is the structural process and the ultimate decision and not at least some of the reasons (pro and con) that underlie the decision, then investors may not have sufficient meaningful additional information to enable them to assess the board’s decision making about governance policy when making their own investment and voting decisions. While disclosure of a process or procedure may tell investors that the issue was discussed and that advice and information was considered, such discussion provides no insight into which factors (pro and con) were deemed important in reaching the decision. There is not enough to tell them “why.”

Why else the SEC worries you won’t get to the “why”.

The past CD&A experience (and the more general effort to improve upon boilerplate disclosure that is almost as old as the disclosure regime) is not be the only reason that the SEC may have some anticipatory anxiety about the quality of the disclosure likely to be provided under the new rules. Even as the staff warned against boilerplate in the CD&A context, many issuers and advisors warned of more of the same in response to the new rulemaking. Ironically, or predictably, depending on your point of view, some commenters objected to these new rules meant as another effort to get behind the “boilerplate” on the ground that they were likely to result in just more boilerplate, instead of any meaningful disclosure that would be useful to investors. Moreover, most of these objections were not put forward in the interest of improvements to the proposed disclosure rules or in proposing suggestions as to how the rules could evince more or better information. Instead the “just more boilerplate” concern was voiced as a reason for not implementing any new disclosure rules meant to get behind the boilerplate at all.

Issuers and their advisors should make certain that the “more boilerplate” predictions of some commenters (primarily issuers and advisors) do not become a self-fulfilling prophecy. As the staff has already warned with regard to CD&A disclosure: “When a company explains its . . . decision-making processes but does not explain why it made the . . . decisions it made, we will ask for enhanced disclosure of the analysis,” — in other words “why?”

Why is it so hard to get to the “why”?

So it isn’t the “what,” i.e., the purely factual and process parts that’s the problem, but rather the “why” (e.g., the reasons and rationale). But why? Since understanding the reasons for a perceived problem is the necessary first step in overcoming it, it is useful to consider briefly why it may be that issuers and practitioners have difficulty in getting to the “why” in crafting disclosures.

Boards and their advisors, aren’t used to saying “why.” That is probably the reason why they predict more boilerplate. The staff’s answer, in sum and substance: “get used to it.”

What goes on behind closed doors… The lack of detail about decision making may also be due to the fact that the advisors who craft the disclosures aren’t always in the room to hear the deliberations or the reasons. Instead they are left to detail the process after the fact.

This has an easy (albeit somewhat self-serving) solution. Not only can the advisors better document a process that they have witnessed, but they can facilitate that process, advise the board along the way, help make certain that directors’ process and deliberation are robust, maybe help the board come to a better result, and better establish a record in broad brush of the most important reasons (pro and con) for the board’s decisions.

But it is also possible that the focus on abstract process, constructs and frameworks as opposed to concrete reasons for decision-making is the result of the fact that the lawyers and advisors are in the room. There is always a danger that lawyers who after all are not equipped to make business judgments, will overly channel and therefore limit board process – the deliberative exchange of ideas that leads to the exercise of sound-even-if-debatable business judgment. Obviously, a proper balance is needed.

The fuel for the fire concern. Boards and their advisors fear that being too specific or revealing too much or being picked apart for perceived mistakes or omissions by shareholder activists or plaintiffs or SEC enforcement.

If the board has adopted a best practices policy there can’t be much cause for complaint – in the form of investor agitation, litigation or a government enforcement action. Of course, some will argue that more information potentially gives potential plaintiffs’ lawyers more to poke at, but plaintiffs’ lawyers won’t go away if there is a corporate calamity or challenge to control just because you said less. In fact, proper disclosure can serve as a defensive document. Where disclosure is sober, straightforward and cautious, it can actually aid in defending against claims of false or misleading statements or omissions.

The concern here is of course greatest when best practices, or at least good practices backed by good explanations, are eschewed.

The sausage factory. The reticence to provide insight into board process may reflect that the sausage-making that goes into many decisions may be messy and the only thing that is important the ultimate outcome.

There is, however, nothing in the rule or in the staff’s comments that require the board to explain every ingredient or every detail about how the sausage was made. Not every reason considered in coming to a good decisions needs to be highlighted or weighted where plenty of good reasons exist and are considered and disclosed. Instead, the general nature of key considerations and whether they generally weighed in favor of the decision or not (but not the relative weights) might be described.

The whole “holistic” thing. It is hard to put a “reason” on decisions made by a group as part of a process. This is the basis for commenters’ and Commissioner Casey’s concerns that the new rules seek description of specific reasons where in reality decisions are made on a “holistic” basis instead of issue by issue or, more to the point, person-by-person, as is the case with director qualification disclosures and the issue of diversity.

Of course, group decision-making is not a simple process. A board is comprised of individuals who have different viewpoints and often there are many individual and conflicting reasons that are of varying importance to different directors. The rule making suggests that this “diversity” of viewpoints is a normative “good.” The disclosure is not meant to describe every factor pro and con or the views and thought process of each board member. Rather, the record should summarize in a general way the important considerations (pro and con) and not just the conclusion that ultimately resulted in the business judgments that a director is qualified (especially when his contribution is viewed in light of the talents of the board as a whole), that the board’s leadership structure is appropriate (in light of other described checks and balances) and that the risk oversight mechanisms the board has put in place are believed to be adequate (in light of the facts and circumstances).

The sanctum sanctorum. High-level, few-details disclosure may be a reflection of the concern that the new rules are “intrusive” and “encroach” upon the Board’s business judgment. The sanctum sanctorum of the board room is increasingly open to the public. The “sunlight” is streaming in. Any “father knows best” paternalism has no place in current corporate governance.

This last point, essentially the “intrusiveness” point, subsumes at least some aspects of most of the others. But a reticence to disclose the reasons “why” may only be, at bottom, a concern that the reasons aren’t good or good enough. Or at least that they are not popular with some shareholders. Disclosure of the reasons why is of course less of an obstacle where the board has adopted a policy that approaches best practices. In that case disclosure is an opportunity for some patting on the back. Instead, explaining the board’s decision making is only difficult in the cases where the board has decided that “good enough is” or that “best practices” aren’t the best choice for their company. At bottom, that is the hard part.

A “How To” Guide for Getting to “Why”

Rather than prompt generic and general boilerplate describing mechanistic procedures or abstract constructs that provide the framework for decision making, boards should view the new disclosure as an opportunity (welcome or not) to reassess the key governance issues targeted by the rules. And, as noted at the outset, because the disclosure assumes that a process has occurred which can then be described in the next proxy statement, boards and their advisors cannot start soon enough. Below, arranged by disclosure topic, are some suggestions as to how boards and their advisors can begin the deliberative process, and develop a robust record that backs up the decisions that they will ultimately be required to disclose and explain.

• New disclosure of the qualifications of directors and nominees for director, and the reasons why that person should serve as a director.

This should be easy – why did the nominating committee recommend each director? Contrary to the concerns of certain objectors, the Commission does not dictate any considerations or criteria that a board must or even should consider in determining whether or not a director is qualified. So it is left for the board to decide and describe. What does each director bring to the table? His or her experience at other companies, in other industries, at this company? As an executive? A director? A committee member? Does he or she have particular industry expertise? What about more personal or subjective attributes? While you don’t want to pigeon hole anyone, it should be possible to highlight at least a few positive attributes that apply to each director without diminishing the accomplishments of the others.

Contrary to the concerns of some commenters, glorying in the accomplishments of one director should not diminish the qualifications of others. Investors, just like boards, can understand that the board is a sum of, and greater than the sum of, its parts. However, in this regard the suggestion by some that the disclosure be made through a check-the-box matrix is probably counterproductive as it may put as much focus on what characteristics a director may be lacking as it does on their strengths and may also invite the sort of person-by-person and trait-by-trait comparison that Commissioner Casey and some commenters found problematic.

While it may take some thought, and any disclosure should note that the list of qualifications is not exhaustive, without disclosure of at least some of the most important of the board’s actual reasons for determining why a director is qualified, investors will have less ability to understand why the decision is sound.

The concern that the disclosure of director qualifications may be “intrusive” will exist only where the board’s nomination process or a directors’ qualifications are deficient. Perhaps the concern is that it may be difficult to characterize certain incumbent board members’ qualifications in a way that is satisfactory to investors? Boards should start assessing this now. They should begin putting together the record of why each director is qualified that includes and even supplements what the nominating committee determines since the operative date for the disclosure is when the proxy is filed. The board should also consider changes now if there is any concern that a particular director is not qualified or less qualified than is desirable. It will be interesting to see if there are any significant changes in the composition of boards as a result of this rule making.

• Additional disclosure of any directorships held by each director and nominee at any time during the past five years.

If any of your directors has served at any company that was involved in the recent financial credit crisis, had a major accounting restatement or has been accused of fraud, investors and the SEC want to know. Boards should begin gathering this information now and determine the pros and cons of keeping any directors who have had the misfortune of serving (probably ably) on the board of a troubled company so that they can explain and defend their decisions.

• Additional disclosure of other legal actions involving a company’s executive officers, directors, and nominees in the prior ten years.

Ditto and then some. Of course, every public company is likely to have been the target of often-frivolous shareholder litigation. Where this is the case, disclose the result – often dismissal or a nuisance settlement with no finding of wrongdoing.

• New disclosure about a company’s board leadership structure.

Obviously, corporate governance watchdogs want companies to separate the functions of board Chair and company CEO. If your company has separated these positions, pat yourself on the back and explain why, feeling free to borrow from the litany of reasons provided by the governance community about why this structure is best.

If your company has not separated the functions, there must be good reasons that the board should re-examine now, re-affirm now, and consider changing now. If there is a decision to keep the CEO as the Chairperson, the board should strongly consider appointing a lead independent director (if it hasn’t already) and explaining how this function (as well as executive sessions of independent directors, etc.) will act as a check against any perception that management dominates the board and corporate policy. Consider citing examples, if they are not overly sensitive, where the board’s actions deviated from management’s interests, e.g., with respect to compensation. The board with a combined CEO/Chairman function should also consider citing studies showing that there is no correlation between separation of functions and corporate performance, hopefully citing their company’s own superior performance as the best example.

A company that does not separate the functions of the CEO and Chairman cannot rely on the “it’s always been this way” “it’s always worked” “if it ain’t broke don’t fix it” approach, or at least does so at its peril. A board with a CEO/Chairman that cannot support that decision with good reasons or with examples demonstrating that the board is independent and acts independently and that corporate performance is (more than) satisfactory, is inviting the scrutiny of activist groups and the SEC. Since such companies may have a hard time justifying a decision on this point, they, especially, should begin thinking about the justifications for continuing to combine the CEO and Chairman functions now.

• New disclosure regarding the consideration of diversity.

Diversity is in the eye of the beholder. Remember, too, you don’t have to have a diversity policy. You don’t have to say anything about diversity unless you have a diversity policy. If you do have a diversity policy you have to talk explain it and explain how it is implemented. If you don’t have a diversity policy, you may have to explain yourself to the governance world.

• Disclosure of the vote results from a meeting of shareholders on Form 8-K generally within four business days of the meeting.

No more waiting until and/or hiding results in quarterly filings.

• New disclosure about the board’s role in the oversight of risk.

The Adopting Release suggests that “[d]isclosure about the board’s approach to risk oversight might address questions such as whether the persons who oversee risk management report directly to the board as whole, to a committee, such as the audit committee, or to one of the other standing committees of the board; and whether and how the board, or board committee, monitors risk.” The Release also posits the possibility of a separate risk committee and suggests that some description of the process and individuals responsible for providing information to the board might be useful to investors. Given the source, these suggestions are probably a good place to start. Boards might also consider continuing education on emerging risk management.

• To the extent that risks arising from the company’s compensation policies and practices for employees are reasonably likely to have a material adverse effect on the company, discussion of the company’s compensation policies or practices as they relate to risk management and risk-taking incentives that can affect the company’s risk and management of risk.

The key here is to get to a place where the board can check the box “not applicable.” In order to achieve this, the board must develop an understanding of the compensation system for all employees and assess (better with the help of independent advisors) whether and how any performance incentives may unintentionally incentivize misconduct. The Board must then develop checks and balances (again, better with the help of independent advisors) meant to minimize any risks to a point that experts can advise that a material adverse effect resulting from perversion of compensation incentives is unlikely to occur. All of this is great process. Risk identification and minimization will almost certainly increase value.

The Adopting Release provides illustrative examples of circumstances that may result in compensation risk that “may have the potential to raise material risks to companies, and the examples of the types of issues that would be appropriate for a company to address,” while stressing that “the situations that would require disclosure will vary depending on the particular company and its compensation program.” The SEC stated that “situations that potentially could trigger discussion include, among others, compensation policies and practices:

• At a business unit of the company that carries a significant portion of the company’s risk profile;
• At a business unit with compensation structured significantly differently than other units within the company;
• At a business unit that is significantly more profitable than others within the company;
• At a business unit where the compensation expense is a significant percentage of the unit’s revenues; and
• That vary significantly from the overall risk and reward structure of the company, such as when bonuses are awarded upon accomplishment of a task, while the income and risk to the company from the task extend over a significantly longer period of time.”

While “[t]his is a non-exclusive list of situations where [the SEC believes] compensation programs may have the potential to raise material risks to the company,” it is obviously a starting list of questions every board of directors should ask.

• New disclosure about the fees paid to compensation consultants and their affiliates under certain circumstances.

If you want more than surveys or general industry information, hire someone who doesn’t do other work for the company and someone other than someone recommended by the CEO.

Good Governance and Good Governance Disclosure is Good For You

While it is undeniably true that the SEC can’t regulate governance, and as equally undeniably true that the SEC wouldn’t mind if the new rules focused on better disclosure have the extra “benefit” of encouraging better governance The new rules presume there will be an examination of governance practices and that this may in some instances result in change towards best practice. Not such a bad thing. If, on examination, the board, management and/or their advisors are concerned that the “why” isn’t good enough, then that conclusion should prompt the board to re-examine its decisions. Perhaps there are in fact other legitimate reasons for the decision that can be better articulated. If not, changes or improvements may well be in order. If the status quo, on reflection, presents unacceptable risks or is not “best practices,” shouldn’t the board assess that conclusion and consider what changes might be made or what counterbalancing mechanisms are or can be put into place?

Going forward, boards and their advisors should make sure that the quality of their deliberative process is as good as possible and that this is apparent in the company’s disclosures. Where the deliberative process is in fact rich and considered, as is usually the case, the board can get credit not only for its good decisions but also its good decision making by providing fuller disclosure. And if board process could be better, the rules offer an opportunity for beneficial self-examination and improvement. The hope is that these new (and any) disclosure requirements will not only prompt better decision making, but also help to prevent bad decisions from being made.

Responsible boards should not resist disclosing the usually very good reasons for their usually very good decisions. If the reasons are good — get them out there! Just tell it like it is. There should be little concern about liability (as opposed to litigation) if you have any good justifications. Even if your reasons are less than perfect, even if the board has overlooked something and even if the omission is obvious in hindsight, there is no cause of action for less-than-perfect decisions made in good faith that have some conceivable rational basis — a low bar which is well below that of most every decision most boards will ever make. Best practices are aspirational goals that aren’t required and aren’t required to avoid liability. But best practices will help to limit liability and even litigation and activist challenges.

This isn’t to say, of course, that every reason for good decisions needs to be highlighted or weighted where plenty of good reasons exist and are considered and disclosed. Instead, the general nature of the considerations and whether they generally weighed in favor of the decision or not (but not the relative weights) might be described.

It is true that if shareholders don’t like a decision or the reasons underlying the decision they can sell their shares or vote those shares against the board the next time around if the decision goes south or sour. Theoretically, shareholders are more likely to sell or withhold if they disagree with the decision but have no idea why the board did what it did. If the board tells the shareholders the good reasons for their decisions, informed by their judgment and experience and that of their advisors, there is no reason to expect the shareholder response would be worse than if they were forced to speculate about the board’s rationale.

Instead, by going through the process of considered deliberation concerning the targeted governance matters and then disclosing the reasons for their decisions and their policies, boards may seek additional information and consider alternatives and may in some circumstances reach a different or better decision. The knowledge that the decision making process will now be a matter of scrutiny, will also make boards more likely to consider, when considering disclosure, how shareholders (and shareholder activists, the SEC and the markets) will react. Are we perpetuating a practice that has caused problems at other companies? If so, are our risk mitigation strategies sufficient and how will we describe them? Is our policy not “best practices” from the point of view of the proxy advisors and will that hurt us? What changes should and can we make — if any?

All of this is, by the way, exactly the sort of good governance process that the SEC in promulgating its disclosure requirements can be presumed to have hoped to promote. All of this is good for the board, good for the company and good for the shareholders — although it may not be good for board participants who aren’t doing their jobs as well as they should.

The unspoken issue is that there are some things the board may not want to say. And those are the things that the rules probably mean to spotlight for directors to examine and fix. If the board does that, its disclosure will describe better and/or more reasoned governance decisions. If the board doesn’t reexamine and fix what needs fixing, then its shareholders will judge. If the board isn’t transparent in explaining its decisions either way, then both the shareholders and the SEC will demand more. As the Adopting Release admonishes, “we would not expect to see generic or boilerplate disclosure that [policies] are designed to have a positive effect, or . . . may not be sufficient to [achieve some general corporate purpose].” Instead, as the staff has already warned: “When a company explains its . . . decision-making processes but does not explain why it made the . . . decisions it made, we will ask for enhanced disclosure of the analysis,” — in other words “why?”