New SEC Letters Prove Agency Is Serious About Transparency

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The watchdog sent warnings to boards regarding risk oversight. Here's what directors need to do before the next proxy season.

The Security Exchange Commission is sending a message that it is serious about improving transparency at publicly traded companies. In what amounts to a gentle warning, the financial markets watchdog sent out more than a dozen letters to major companies in a variety of industries requesting that they “expand discussion” on certain aspects of how their corporate boards oversee company risks.

According to a Bloomberg report, American Express, Dell Technologies, Humana Inc., Heartland Express, Sherwin-Williams, ServiceNow Inc. and Fidelity National Information Services Inc. were among companies receiving letters. The report states that Cicely LaMothe, acting deputy director of the SEC Division of Corporate Finance told attendees at a recent Practicing Law Institute securities conference that proxy statements would be getting specialized attention from the agency, and the current letters were an effort to encourage greater transparency about board leadership structure and risk oversight before the 2023 proxy season.

Bloomberg quotes LaMothe: “Our comments are really meant to provide a few guideposts along the way to consider, but by no means are they meant to create a stopping point or be prescriptive. It’s not intended also to provide a blueprint for disclosure.”

While it may not be giving boards a blueprint, it certainly gives boards plenty to think about regarding how the proxy statements they’ve submitted in the past are being interpreted. For example, the SEC letter to American Express asks for additional information about board leadership in the following manner:

“Please expand upon the role that your Lead Independent Director plays in the leadership of the board. For example, please enhance your disclosure to address whether or not your Lead Independent Director may:

• represent the board in communications with shareholders and other stakeholders;

• require board consideration of, and/or override your CEO on, any risk matters; or

• provide input on design of the board itself.

This suggests that the SEC feels investors need more transparency in order to understand what measures are in place to oversee the CEO or to make sure the board continues to function effectively if a crisis occurs. This is a fair question to ask of corporate boards—now the SEC is sending a message that it wants each company’s answer to this question (and others) to be out in the open for all to see.

Corporate boards that receive such a letter from the SEC (and perhaps some that don’t) should acknowledge that whatever language they have in their proxy statement regarding board leadership needs to be updated with additional detail. Furthermore, the SEC’s actions may mean:

• Boards may need to use less “boilerplate language” in proxy statements when discussing risk. Since the SEC has started this practice of calling on boards to “enhance” explanations regarding risk in their proxy statements, boards should expect this practice to continue. More detailed explanations regarding how boards intend to handle risk (on any number of topics) will become the standard.

• Boards may need to review its leadership structure and determine if it provides adequate oversight to deal with changing risks in its industry. If the leadership structure has been in place for decades, boards may want to make certain that it provides appropriate oversight for the company as it exists today. A new risk assessment for the company may be in order.

• A board discussion regarding the role of the CEO may be in order. Since it appears that the SEC is interested in board oversight of the CEO, it might be helpful to discuss if or when one person could hold the position of CEO and board chairman. Once the board determines how it would override the CEO on risk matters, then it can better articulate that in the proxy statement.


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