Back on July 1, the Securities and Exchange Commission voted 3-2 in favor of proposed changes for compensation and board risk management disclosures. The report was released July 10 and comments on the proposals are due Sept. 15, with the commissioners planning to move swiftly to implement these new measures beginning 2010.
Among the proposed changes within the 137-page report is a rule that would force public corporations to disclose the board’s role in overseeing the management of inherent operational and financial risks.
Disclosures of the board’s role in the risk management process may also benefit investors. Expanded disclosure of the board’s role in risk management may enable investors to better evaluate whether the board is exercising appropriate oversight of risk management.
The report goes on to state that the proposed amendments should, among other things, increase the efficiency and competitiveness of the U.S. capital markets by providing investors with additional information on risk incentives and corporate risk management practices.
The key recommendation? A change in short-term incentives for employees:
Indeed, one of the many contributing factors cited as a basis for the current market turmoil is that at a number of large financial institutions the short-term incentives created by their compensation policies were misaligned with the long-term well being of the companies. By contrast, well-designed compensation policies may enhance a company’s business interests by encouraging innovation and appropriate levels of risk taking.
The proposed amendments to disclosure are likely to be implemented in hopes of preventing a future financial crisis like the one we’ve seen and are currently recovering from, albeit slowly. This proposed SEC rule proves that risk management will continue to be at the forefront of every action and decision a public company will make.
How is your company preparing to spread the role of risk management and implement SEC rule 33-9052?