This was such a great panel of in-house practitioners – featuring Leidos’ Henrique Canarim, Etsy’s Jennifer Card and Intel’s Alex Shukhman – that I’ve decided to highlight their commentary in a series of blogs. This particular blog addresses the question of: “When you’re working on brand new disclosure – some new development or a new rule requirement – what is your recommended process for starting? Bulleted outlines, reviewing other sample disclosures?”
- Intel’s Alex Shukhman – Look at who’s driving the development. Is it a regulatory body or a stockholder or a proxy advisory firm? Each may have different perspectives. Then we review the guidance on the topic to create a list of the key components – and that typically will manifest itself into some kind of a bulleted outline.
We will look at what are the facts – or the actions – that are necessary in order to support such disclosure, as well as pull any relevant samples on the topic. We will consider the other stakeholders who may be impacted, including internal bodies such as the board or board committees. We will typically prepare a RACI chart to determine who’s responsible and accountable, who’s consulted and who’s informed. - Etsy’s Jennifer Card – I like the idea having a RACI chart, as I think that really sets clear accountability. I would first start by determining what’s driving the new disclosure. If it’s a rule development, understanding what it is that the rule requires by reading the SEC’s adopting release is a great place to start, as well as by reading the actual rule text. I often turn also to the SEC’s Fact Sheet and various law firm memos for summaries.
It’s important to know when the effective date is for the development. Is this something that needs to happen immediately for a company – or is there some lead time to come into compliance with the new disclosure requirements?
I find drumming up a working draft is a great way to start. Consider creating an outline with bullet points that sketch out actual disclosures. I might look to examples from early filers – or benchmarking with outside counsel or other companies – to see how extensive disclosure may be in response to a new requirement.
Another point to keep in mind – and this often goes to the RACI chart – is remembering that it’s not only important to draft disclosure that’s responsive to the new rules, but also to be able to explain that to others that you might be working with as internal stakeholders. That’s often as important – if not more – than what the actual disclosure might be.
We also consider how commonly are other companies implementing new disclosures? Is this something that’s an emerging practice – or a common practice? We then consider different alternatives. We might have a narrative option and then one or two graphic options. Consulting with others is also a really important part of our disclosure process.
Not only the legal team working through the actual language, but if you’re in-house, you likely need to share your new draft disclosure with your accounting, investor relations, and communications teams, as well as subject matter experts. And of course, your disclosure committee and possibly the appropriate board committees. It’s really important to have solid timelines – and if you plan on creating new or different disclosures, develop a project plan that’s responsive to those timelines and deadlines. - Leidos’ Henrique Canarim – I would like to emphasize that starting early is really important as oftentimes you are not going to be able to develop something – or have this thoughtful process – if you are just bundling it with a general disclosure process. If you’re able to call out – or separate – the new items that you’re going to be creating early, you might be able to start with a draft and have that reviewed on its own rather than with the rest of the disclosures.
We had a recent example of that with the pay vs. performance disclosures that were included in proxy statements last year. There wasn’t a whole lot of guidance available when that rule became effective and we had to make sure that the folks that were crunching the numbers understood what was required and that we had built the proper internal controls. We had to leverage advisors who were advising dozens and dozens of other companies on the same requirements.
I also want to call out that you should educate your board very early. We were lucky enough to be able to have a conversation with our compensation committee on those requirements early to educate them and even to mock what that disclosure might have looked like – so that when we put the proxy in front of them, the CD&A they saw wasn’t a surprise. They understood what we intended to do – and they understood what was the rationale behind the SEC’s rule.
I also think we need to acknowledge that you might not get things out absolutely right the very first time. So being open-minded about evolving your disclosures after you insert a new element is a smart thing to do. Keep benchmarking what you’re doing against others and refine it. Make it an iterative process and over time, you’ll be more aligned with market practice.
