Disclosure Rules for Executive Compensation in Japan
Sparked by the controversy surrounding Mr. Carlos Ghosn’s compensation, disclosure requirements for the details and determination methods of executive compensation in Japan are set to be expanded. In Japan, a rule was introduced for fiscal years ending in or after March 2010, requiring listed companies to disclose the compensation of any director receiving 100 million JPY or more.
Items required to be disclosed in the Annual Securities Report (Yuka Shoken Hokokusho) include: the total amount of compensation by director category (directors, statutory auditors, and outside directors), the total amount by type of compensation (e.g., base salary, stock options, bonuses, and retirement allowances), and the number of applicable directors. Furthermore, if the company has established a policy regarding the determination of the amount or calculation method of directors’ compensation, the content of that policy and the method of its determination must be described. If no such policy has been established, that fact must be stated.
U.S. Disclosure Rules and Examples for Executive Compensation
In the United States, executive compensation disclosure has been the subject of numerous debates, leading to repeated revisions of the requirements (Regulation S-K, Item 402). This has resulted in the requirement for detailed disclosure known as Compensation Discussion and Analysis (CD&A), which can be described as the compensation equivalent of the MD&A (Management’s Discussion and Analysis).
In the CD&A, companies are required to disclose and explain the compensation of the CEO, the CFO, and, at a minimum, the three next most highly compensated executive officers. While reading the full text is substantial, we have linked Apple’s CD&A here to provide a concrete image. It spans a full 20 pages.
Reduced Disclosure for EGCs
For ventures, such as those pursuing an IPO on Nasdaq, that qualify as an Emerging Growth Company (EGC), scaled disclosure requirements for executive compensation are permitted, and they are not required to prepare a CD&A. Instead, EGCs are only required to disclose:
- Compensation for the CEO plus the two most highly compensated executive officers (a total of three individuals). (Disclosure for five individuals is not required, and disclosure for the CFO is not mandatory).
- A Summary Compensation Table and narrative description for the past two fiscal years (as opposed to the standard three years).
- Outstanding equity awards at fiscal year-end.
- A Director Compensation Table.
- A narrative description of other material items (such as retirement benefit plans).
This scaled disclosure is permitted. Again, a specific example may help to form a clearer image, so we have linked the disclosure example from Allena Pharmaceuticals, which went public in 2017. The disclosure is about 5 pages long. While still more extensive than Japanese requirements, it is far lighter than a full CD&A.
It should also be noted that in the United States, executive compensation is almost always disclosed in the Proxy Statement (Form DEF 14A) filed with the SEC for the annual meeting of shareholders, rather than in the Annual Report (Form 10-K).
