SEC Chairman Cox Expounds on CD&A and Plain English

A few weeks ago, I blogged about SEC Chairman’s Cox‘s first comments on incoming executive compensation disclosures under the new disclosure rules.  Chairman Cox recently gave another speech further explaining why he believes that executive compensation disclosure, and particularly the CD&A, is not in plain English.  The part of the Chairman’s speech that deals with compensation disclosures is quite long.  Below are just a few excerpts to give you a sense of his message:

– “I have to report that we are disappointed with the lack of clarity in much of the narrative disclosure that’s been filed with the SEC so far.  Based on the early returns, the average Compensation Disclosure and Analysis section isn’t anywhere close to plain English.  In fact, according to objective third-party testing, most of it’s as tough to read as a Ph.D. dissertation.”

– “For starters, the executive pay disclosures in the study were verbose.  We had it in mind that they’d be just a few pages long, but the median length for the CD&As was 5,472 words–over 1,000 words more than the U.S. Constitution.”

– “Just as the Black-Scholes model is a commonplace [metric] when it comes to compliance with the stock option compensation rules, we may soon be looking to the Gunning-Fog and Flesch-Kincaid models to judge the level of compliance with the plain English rules.”

– “So where do you think our new Compensation Disclosure and Analysis sections come in, seeing as how they’re newly minted in ‘plain English’ for the average investor?  In these tests, the average Fog Index for the CD&As in the sample was 16.45.  That’s about the same as an academic paper, such as a Ph.D. dissertation here at USC.”

– “But the SEC’s own qualitative review of this year’s proxy statements indicates that we have far to go before we can say that legalese and jargon have truly been replaced by plain English.  It’s clear that many companies are letting lawyers have the final say on the CD&A.  As the firm that undertook this study points out, many of the problems could easily have been fixed in just a few hours by a qualified copy editor.  Retail investors deserve better.”

Just like the Chairman’s last compensation disclosure speech, some lawyers are disturbed and have sent me e-mails expressing their dismay (for example, many missed the point in the SEC’s adopting release indicating that the CD&A should only be a few pages long).  For those out there who have truly worked hard to meet the extensive new requirements, I can understand their frustration and expect that the SEC will be providing us with guidance to clarify their CD&A expectations for next year.

On the other hand, far too many CD&As look eerily similar to compensation committee reports from the past and don’t really provide much in the way of analysis–despite their verbosity!  In a previous blog post, I noted that some have told me of their efforts to cut through the HR department’s attempt to put boilerplate in the proxy statement.  Since then, I have heard from plenty of non-lawyers with horror stories about lawyers who don’t understand how to narrate in plain English and worse (for example, lawyers’ tendency to hide disclosures in footnotes).  Clearly, the drafting process will need to be better managed next year for many companies.

We are re-tooling our 4th Annual Executive Compensation Conference to ensure it’s as practical as can be–with a theme of “lessons learned.” And our companion conference, Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference, will include a panel regarding the drafting process and how to manage it.  So save the dates of October 9-11…