It’s that time of year. Time to dust off your D&O questionnaire and figure out what to do now for the upcoming proxy season. The D&O questionnaire is an important part of the proxy drafting process.
When I joined Cooley, I was pleasantly surprised to find out that we have our own electronic D&O questionnaire product – Cooley D+O. I was talking with Luci Altman about it, and she said Cooley D+O seems superior to the popular electronic D&O questionnaire product she was using at the in-house job she just left a few months ago, so it might be worth checking out for yourself. If you want to try a demo, please reach out to me or your Cooley contact.
Getting back to the importance of D&O questionnaires, it’s notable that several recent SEC enforcement actions involving a failure to adequately disclose perks called out the D&O questionnaire process – and one of these enforcement actions specifically mentioned a company’s failure to have a formal written policy for the completion of D&O questionnaires.
According to a 2019 study by QDiligence, the average length of a D&O questionnaire is 40 pages, comprising eight sections and 65 questions. I imagine that average has only gotten longer in the past five years. That’s an imposing document for an insider with little time on their hands to receive!
This is not a fun task for insiders. As the corporate secretary, you’ll rarely get questions from directors and officers about it, which reflects that it’s not the highlight of their day. Yet, it’s important that they take it seriously. You have to be sympathetic and patient – but diligent and firm – so that you get all the information you need.
Here are nine aspects of the D&O questionnaire process for which in-house lawyers must use their judgment (this is Part 1 of a two-part blog series):
- Figure out your lead time
- Set the tone
- Structure the questionnaire
- Frame the questions properly
- Pre-populate answers
- Rely on director assistants
- Analyze answers
- Prod non-responsive insiders
- Use answers for other purposes
1. Figure out your lead time
D&O questionnaires are distributed for completion during the last month of the company’s fiscal year. For a company with a December 31st fiscal year-end, the questionnaires often are distributed sometime in January.
Of course, all companies have fairly well-defined timelines that accommodate all of the steps involved in their proxy season. Those timelines typically are spelled out in a written document, typically called the “Time & Responsibility Schedule.”
Your timeline should allow for ample time to accommodate multiple rounds of review, include a hard deadline for receiving responses, and then bake in a short period for your analysis of the responses and the time it will take to seek clarifications from those who filled out the D&O questionnaire.
Time is often tight during this process. That’s why more and more companies are leveraging technology to facilitate the activity – including using Cooley D+O. Some build an electronic framework on their own.
According to data collected by QDiligence, those using a digital D&O questionnaire shorten their lead time significantly from three months to one. Electronic questionnaire users often can shave a week from their deadline, from 3-4 to 2-3 weeks.
Those who have lived through it know that the proxy season flies by, so although the questionnaire responses are important for diligence purposes, companies don’t wait for responses to begin drafting their Form 10-Ks and proxies. They start drafting well before receipt of the completed questionnaires.
When doing so, it’s important to place brackets around – or otherwise highlight – draft disclosures that need to be verified by questionnaire responses.
2. Set the tone
You’re giving this lengthy questionnaire to people that are more senior than you. People who are busy. People who may despise lawyers. They don’t want to fill the thing out. That dislike for the questionnaire only grows when they see the repetitiveness of the questions. They want you to make the document simpler. To make it go away.
To make your job easier, educate them as to why you’re going through this exercise. This is an important compliance matter. And that you’re doing all you humanly can do to make it as easy for them as you can.
One of the best suggestions I’ve heard is to place a “cheat sheet” at the forefront of the document. It ties all the different rules and regulations to specific questions in the document – and should help hit them over the head with the seriousness of the matter. It’s best to do this up front to make the point rather than loading up the document with footnoted citations they would otherwise ignore – although electronic D&O questionnaires often link to the related rules and regulations, which isn’t such a burden.
3. Structure the questionnaire
Before you send out your D&O questionnaires, you first need to check whether any regulatory changes have happened over the year that require any updates to your model form. Some years there are updates, some years there aren’t. There is definitely a herd mentality about what the questionnaires ask for. They are fairly standardized, which makes sense since the questionnaire is closely tied to SEC rules that require certain disclosure.
As a result, the content, question types and organization are remarkably similar for all companies. Interestingly, though, there is significant diversity about how companies gather information within each category. For example, according to that QDiligence study, every company requests biographical information – but some achieve that in four questions while others may require as many as 10 questions.
Some companies work hard to reduce the number of questions, gathering what information they can from alternate sources. Others include all information within the confines of each questionnaire, which increases the length of the questionnaire, but may be more convenient for insiders.
Slightly more than half of companies use a single model form for all respondents. If you’re using a third-party electronic questionnaire, I believe you’re using just a single model form. Those that aren’t relying on third-party vendors might have slightly different versions of their model questionnaire for their directors, officers and the CEO. The versions really aren’t “different” – they just omit sections that aren’t relevant. For example, questionnaires received by management don’t need to include the independence sections or sections about audit or compensation committee qualifications.
Authored by
Broc Romanek