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SEC Chairman Cox Says Executive Compensation Descriptions in Proxy Statements Defy Easy Understanding

An analysis of proxy statements recently filed by about 40 companies finds that they read more like Ph.D. dissertations than the plain-English, easy-to-understand documents required by the SEC, says Christopher Cox, the agency’s chairman.

March 23, 2007
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For years the Securities Exchange Commission has tried to pierce the dense fog of legal jargon that obscures the details of executive compensation packages. And although a rule requiring companies to write proxy statements in plain English went into effect in January, it doesn’t appear that much ground is being gained on this front.

“Companies are still allowing lawyers to have the final say on writing the proxies,” SEC Chairman Christopher Cox told a gathering of business leaders at the USC Marshall School of Business in Los Angeles on Friday, March 23. Cox was keynote speaker for a corporate governance conference at the school.

An analysis finds that the proxy statements recently filed by about 40 companies read more like Ph.D. dissertations than the plain-English, easy-to-understand documents required by the SEC, Cox said.

A variety of readability measuring tools were used to arrive at this conclusion, Cox explained. The proxies were assigned an average readability score of 16.45, using the “Gunning Fog Index,” which assesses the readability of written material by taking into account sentence length and complexity of words being used.

By comparison, The Wall Street Journal, which has a sophisticated base of readers, ranks around 12 on the index and Reader’s Digest, which is aimed at a broad audience, comes in at an 8.

The proxies are not only complex, but lengthy, stacking up to 30 to 40 pages, rather than the handful pages called for by the SEC.

Cox said he was disappointed with the lack of clarity in the early batch of proxies. “We are determined to stop bad habits in writing to retail investors,” he said.

It appears, however, that there won’t be significant ramifications for those companies that fall short in complying with the plain-English requirements. The companies that have submitted these difficult-to-understand texts won’t have to refile, and they won’t be fined, according to Cox.

Gina Ruiz

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