It’s never too early to start planning for proxy season. While spring annual meetings are still months away, this year in particular, companies have no shortage of prep work to do as they consider the bevy of new disclosure requirements and expectations driven by recent US Security and Exchange Commission (SEC) regulations and proposals. These rules are designed to improve the consistency and comparability of the information companies disclose publicly. And proxy statements and 10-K annual reports will need to look significantly different this year as a result.

Here’s a look at what’s new this proxy season and what companies should consider as they prepare their communications for the upcoming season.

Meet new disclosure requirements head-on

The SEC’s recently released cyber, clawback, and pay versus performance rules will significantly impact the filings companies prepare in 2024.

Cybersecurity Disclosure Rule: The new SEC Cyber Disclosure Rule primarily focuses on risk management, strategy, and governance in addition to the now mandatory disclosure of cyber incidents.

Companies will need to:

• Include in the proxy a description of the board’s oversight of cybersecurity risks (Prudential, pg. 20) along with descriptions of board processes for the assessment, identification, and management of material risks from cybersecurity threats
• Provide additional disclosures in other SEC filings including the 10-K and 8-K in the case of material security breaches (Caesars Entertainment)

Clawback Rule: Clawback provisions on executive compensation—or procedures to recoup undue payments due to material error, fraud, or misstatements— have been the best practice in corporate governance for years. A significant share of publicly listed companies already have clawback policies in place. But any NYSE or Nasdaq-listed company that does not will need to comply with new SEC mandatory requirements for compensation recovery provisions by December 1, 2023.

Listed companies will need to:

• Include clawback policies as exhibits in the 10-K
• Provide accompanying disclosures that delineate the incentive-based compensation subject to recovery and quantify the recovery of excess incentive-based compensation
• Explain how clawback policies were applied during or after the last complete fiscal year
• Indicate via checkboxes on the cover page of the 10-K if the financial statements reflect a correction of an error to previously issued financial statements and whether any corrections are restatements requiring a recovery analysis of incentive-based compensation under the clawback policies

In a recently filed 10-K, Cracker Barrel Old Country Store included as an exhibit and to comply with the new clawback rules, an executive compensation recovery policy, which delineates the incentive-based compensation during a clawback period of three years in the event of erroneously awarded compensation, defined in the policy.

Pay versus Performance Rule, Year Two: The Pay Versus Performance rule adopted last year requires registrants to demonstrate how executives’ pay aligns with the company’s financial performance. Registrants with a fiscal year ending on or after December 16, 2022, reported for the first time in 2023.

For the 2024 proxy season, companies will need to:

• Disclose information in a specific tabular (Blackrock, pg. 90) form and tag each value in the table and pay vs performance disclosure using Inline XBRL (Small Reporting Companies (SCRs) are not yet required to use Inline XBRL, but should begin preparing for this upcoming requirement)
• Include a narrative or graphical disclosure addressing comparability to total shareholder return (TSR), net income, and a company-selected financial metric
• Report four years of data (three years for SRCs)

Get ahead of new disclosure requirements coming soon

While not yet official, two major proposed SEC rules will impact proxy filings in the very near future. Disclosures are not mandatory for the 2024 proxy season, however, addressing these impending rules in this year’s filings is best practice and will provide stakeholders with a ‘status update’ on the company’s ability to report in line with the SEC and other reporting requirements.

Enhancement & Standardization of Climate-Related Disclosures: Governance, strategy, risk management, and metrics and targets form the foundation of the SEC’s proposed climate disclosure rule.

Companies will soon need to:

• Describe governance, skills, and oversight structures for climate risks and opportunities in the proxy (Proctor & Gamble)
• Identify activities that directly or indirectly relate to climate change impacts or Greenhouse Gas (GHG) emissions in the risk section of the 10-K (Mirion pg. 44) 

Human Capital Disclosure Rule: The value employees play in a company’s success continues to gain deserved recognition. The SEC believes that investors view employees as assets that should be disclosed for public visibility and input into investment decisions, and this belief serves as the basis for the proposed Human Capital Disclosure rule.

Companies should strategically prepare to:

• Disclose human capital metrics including:
  • Number of employees delineated by full-time, part-time, or contract status
  • Rate of employee turnover
  • Total cost of issuers workforce, including major components of compensation (i.e. health benefits, stock ownership)
  • Workforce demographics data
• Provide narrative disclosures in the Management Discussion & Analysis (MD&A) section of the 10-K addressing:
  • Strategy around how the company intends to maintain workforce (i.e. employee satisfaction, career development, retention strategies)
  • How emerging technologies will impact workforce

Create best-in-class disclosures in 2024

Companies looking to stand out in the eyes of their stakeholders will do more than meet the minimum disclosure requirements. They will create filings that thoughtfully consider the best ways to deliver information shareholders value most. Here are a few additional tips that can elevate a company’s communications.

• Include a board skills matrix. A board skills matrix is a helpful visual aid providing an informative snapshot of the backgrounds and skills of each board member. A standard board matrix (Old Republic, pg. 19) should include identifiers such as industry background (i.e. industrials, energy, or consumer products), organizational expertise (i.e. finance or strategic planning), and gender and diversity categories. In response to the new SEC cyber and climate rules, the board matrix presents an opportunity to highlight various board members’ capabilities in these areas and offer stakeholders a quick confirmation of a well-rounded board fully prepared to address upcoming changes for the company.
• Incorporate board oversight and engagement details. Companies can use the proxy to share details on the board’s involvement and oversight across all ESG programs. Include how often board committees with ESG oversight meet, what is covered during these meetings, and what responsibilities the committee has, such as policy review and approval and material topic prioritization.

Companies can also showcase key milestones or achievements in the organization’s sustainability journey, such as an updated code of conduct, completion of the first emissions inventory, or publication of an inaugural corporate sustainability report (CSR). Be sure to take every opportunity to highlight the progress of ESG programs and restate the company’s commitment to continuous improvement.

• Prioritize readability and consistency. There is an increasing trend to publish the proxy report as a piece of branded communications collateral. The proxy report must first and foremost include the required information and contents as dictated by the SEC. But there is no reason it can’t also be branded and styled in line with the company’s other communications materials. The proxy report also should be simplified to make it more digestible to readers. Using a more reader-friendly tone, including white space and paragraph breaks, and incorporating more graphs and tables to break up the text are great ways to create a report stakeholders will enjoy reading.

However the report is crafted, keep in mind that consistency across all reporting is key. The SEC and other key stakeholders are reading ESG communications. So, it is essential to ensure that the disclosures and contents in the proxy are in perfect alignment with the CSR and other ESG communications.

The SEC and shareholders will be looking at filings more closely than ever

Companies will need to give their proxy reports and 10-Ks significant attention in the upcoming season as they disclose on many topics for the first time. While there is much to consider in terms of compliance, there is also a significant opportunity to send a strong message to shareholders that the company is in tune with increasing expectations and fully committed to transparency in communications.

Need help optimizing your proxy to meet the needs of all stakeholders? Let’s get started today. Riveron can ensure your proxy addresses investor expectations for ESG in the ways that are best suited to your company. We can assist with developing and implementing a program, writing policies, and updating the proxy with critical E&S information that fills in gaps and is easy for all stakeholders to understand. Give us a call to learn more about how to get this year’s proxy statement right.