SEC focuses on Item 407 board governance disclosure

Mark Shannon, Steven King
| 2/8/2023
SEC focuses on Item 407 board governance disclosure

Current SEC reviews of proxy statements focus on board governance disclosure. Example comment letters show what the SEC is looking for.

The Securities and Exchange Commission (SEC) has long required proxy statements under Item 7, “Directors and executive officers,” of Schedule 14A, “Information required in a proxy statement,” to include board governance disclosure under Item 407(h), “Corporate governance,” of Regulation S-K. Item 407 generally requires disclosure of the board’s role in risk oversight, including how the board executes on risk oversight and how the board’s risk oversight affects board structure. While SEC interpretive guidance and SEC staff previously have reminded stakeholders that Item 407(h) might elicit disclosure of how the board manages risk, in various recent forums, SEC staff members remarked that a current focus of reviews is whether registrants need to refine or enhance their Item 407 disclosures. Staff members said disclosures are not always sufficiently tailored to address how the registrant’s board structure and risk oversight address the unique circumstances and challenges of the registrant’s business, which is information investors need to make informed voting and investment decisions. The staff members also observed:

  • Comment letters on this topic are not intended to:
    • Target any particular industry or leadership structure
    • Create new disclosure obligations
    • Influence how companies operate or structure their board (for example, the rule’s adopting release points out, “different leadership structures may be suitable for different companies”)
  • Investors should receive transparent disclosure about why a registrant chose a particular leadership structure.
  • Item 407 is less prescriptive than other Regulation S-K disclosure requirements, but the Item 407 adopting release provides preparers with useful rationale and guidance.
  • Staff comments in this area generally will focus on future disclosure enhancements.
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Example SEC comments on Item 407(h)

Certain of the SEC’s comments on Item 407(h) are publicly available. The staff typically is looking for compliance in future filings, and a selection of comments follows:

Please respond to these comments by confirming that you will enhance your future proxy disclosures in accordance with the topics discussed below as well as any material developments to your risk oversight structure. For guidance, refer to Item 407(h) of Regulation S-K.

Please expand your discussion of the reasons you believe that your leadership structure is appropriate, addressing your specific characteristics or circumstances. In your discussion, please also address the circumstances under which you would consider having the Chair and CEO roles filled by a single individual, when shareholders would be notified of any such change, and whether you will seek prior input from shareholders.

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

Please expand upon how your board administers its risk oversight function. For example, please disclose:

  • The timeframe over which you evaluate risks (e.g., short-term, intermediate-term, or long-term) and how you apply different oversight standards based upon the immediacy of the risk assessed;
  • Whether you consult with outside advisors and experts to anticipate future threats and trends, and how often you re-assess your risk environment;
  • How the board interacts with management to address existing risks and identify significant emerging risks;
  • Whether you have a Chief Compliance Officer and to whom this position reports; and
  • How your risk oversight process aligns with your disclosure controls and procedures.

We note the statements made regarding energy, emissions, and air quality in your Sustainability Report March [202X] along with the sustainability policy you issued in March [202X]. Please tell us how the disclosure in your proxy statement addresses the role of your Board of Directors in overseeing climate change-related risks. Your response should explain how the Board administers its oversight function with regard to climate change-related risks and the effect this has on its leadership structure. Refer to Item 407(h) of Regulation S-K.

Please disclose: why your board elected to retain direct oversight responsibility for specific risks, such as social and environmental matters, rather than assign oversight to a board committee.

What’s next

With a number of changes affecting upcoming proxy statements (for example, universal proxy rules, pay-versus-performance disclosure), now is a critical time for boards and management to evaluate whether their Item 407 disclosure should be enhanced to provide investors with sufficient information about the registrant’s chosen leadership structure and board risk oversight.

Contact us

Mark Shannon
Mark Shannon
Partner, National Office
Steven King
National Office