An SEC enforcement action against General Electric and an ongoing SEC investigation of Tyson Foods reflect increased SEC scrutiny of disclosure relating to executive compensation. This Update summarizes the enforcement action and the pending investigation and offers practical guidance.
GE Enforcement Action
GE has consented to an SEC order (released September 23, 2004) in which the SEC concluded that GE's 1997 to 2002 proxy statements and annual reports failed to fully and accurately disclose substantial retirement benefits provided to GE's former CEO and Chairman, John F. "Jack" Welch. The order directs GE to cease and desist from committing or causing any violations or future violations of the proxy solicitation and periodic reporting provisions of the federal securities laws.
In 1996, GE entered into an "employment and post-retirement consulting agreement" with Mr. Welch. The agreement provided that, upon retirement, Mr. Welch was entitled to "continued access to Company facilities and services comparable to those provided to him prior to retirement, including access to Company aircraft, cars, office, apartments, and financial planning services." From 1997 to 2002, GE's proxy statements and annual reports disclosed that Mr. Welch was entitled to "continued lifetime access to Company facilities and services comparable to those which are currently made available to him by the Company."
GE appended the agreement to its 1996 proxy statement and referenced it in each Form 10-K until 2002. But GE did not detail the forms of compensation in its proxy statements or annual reports and never quantified Mr. Welch's retirement benefits. In fact, the SEC determined that in his first year of retirement, Mr. Welch received approximately $2.5 million in benefits under the agreement, including access to GE aircraft for unlimited personal and business travel; exclusive use of a furnished New York City apartment that had a rental value of $50,000/month; unrestricted access to a chauffeured limousine; a leased Mercedes; New York City and Connecticut office space; services of tax and estate advisors, bodyguards and a personal assistant; and communications and security systems at his home.
The SEC determined that GE's proxy statement and Form 10-K disclosure "failed to fully describe the substantial benefits that Welch would receive as part of the agreement" and the agreement itself "did not provide further meaningful and complete disclosure of those 'facilities and services.'" Accordingly, GE's disclosure was inadequate and violated the proxy disclosure and periodic reporting requirements of the federal securities laws.
In August 2004, Tyson Foods reported that the SEC intends to bring a civil enforcement action against Tyson Foods and may also seek a monetary penalty. The SEC contends that Tyson Foods failed to adequately disclose approximately $1.7 million in perquisites provided to its former Senior Chairman, Don Tyson, and failed to maintain adequate internal controls over the personal use of company assets. In response, Tyson Foods reported that independent members of its board of directors were reviewing the matter.
Tyson Foods also reported that the SEC may bring cease-and-desist orders against two nonexecutive employees for failing to adequately report the perquisites and that the SEC intends to bring a similar civil enforcement action against Mr. Tyson personally.
As of October 4, 2004, it appears that the SEC has not instituted any formal action against Tyson Foods or those individuals.
Proxy Statement Should Provide Full and Detailed Disclosure of Noncash Compensation. The purpose of executive compensation disclosure regulations is to improve shareholder understanding of all forms of compensation paid to senior executives and directors. Perquisites must be disclosed if they exceed in the aggregate the lesser of $50,000 or 10% of the executive's salary and bonus compensation. Issuers must specifically identify and quantify in a footnote any perquisite exceeding 25%of the total perquisites provided to the executive.
Don't Hide the Ball. Executive compensation disclosure should be in the relevant proxy statement or periodic report--not a previously or concurrently filed agreement, especially where the agreement language itself is not specific.
Compensation Committees Should Regularly Review All Executive Compensation and Benefits. Review the perquisites provided to senior executives and directors at a meeting of the Committee to prevent waste of corporate assets and to ensure that committee members understand the nature and value of such perquisites and can ensure that proper disclosure is made. The Disney case (addressed in our June 26, 2003 Update) underscored that a board's failure to inquire adequately into the total cost of the compensation to its executives could amount to a breach of the duty of good faith. Quantify the aggregate value of all compensation to each executive. As the GE enforcement action and the Tyson investigation highlight, quantifying perquisites should be a key part of this analysis.
Robust Disclosure Practices Procedures and Internal Controls Should Address Compensation Issues Such as Perquisites, Along With Other Financial Information. In preparing to file SEC disclosure documents, the disclosure practices committee should be certain that it is adequately considering disclosure issues related to compensation. In the process of preparing for CEO and CFO certifications of SEC reports, review internal controls relating to executive compensation. The Tyson investigation illustrates that inadequate controls over compensation could rise to the level of either a "significant deficiency" or even a disclosable "material weakness" in internal controls. Even nonexecutive employees charged with preparing disclosure documents may find themselves the subject of SEC scrutiny, or possible SEC action, if the documents they prepare contain material omissions or misstatements regarding compensation matters.
This Update provides a summary of the SEC's enforcement action against GE and Tyson Foods' announcement of the SEC investigation against it. You can find the full text of the SEC's cease-and-desist order against GE at http://sec.gov/litigation/admin/34-50426.htm. You can find Tyson Foods' press releases regarding the SEC investigation at http://www.tysonfoodsinc.com/corporate/news/.
You can find additional information regarding recent developments and recent laws, regulations and rule proposals of interest to public companies on our website.