Earlier this month, I wrote on an SEC interpretive release addressing Item 303 of Reg S-K (see SEC Release on Key Performance Metrics Has Implications for Compensation Professionals Too), suggesting that, although this guidance relates to the MD&A, it was also relevant to executive compensation and disclosure professionals, because key performance metrics are usually an important part of short- and long-term incentive compensation plans and disclosures. The release seemed relatively benign, but worth reviewing for its increased scrutiny on performance metrics. But then only a few weeks later, the SEC issued a press release announcing an enforcement proceeding related to the matter. As fellow blogger, Lynn Jokela wrote on:
It looks like the SEC didn’t waste much time in finding its big company poster child for key performance indicators (KPI). Yesterday, the SEC issued a press release announcing an enforcement proceeding where it brought charges against Diageo plc for disclosure failures. The enforcement proceeding is right on the heels of the SEC’s KPI interpretive release that John blogged about just a couple of weeks ago. Here’s the crux of what the SEC had to say:
According to the SEC’s order, employees at Diageo North America (DNA), Diageo’s largest and most profitable subsidiary, pressured distributors to buy products in excess of demand in order to meet internal sales targets in the face of declining market conditions. The resulting increase in shipments enabled Diageo to meet performance targets and to report higher growth in key performance indicators that were closely followed by investors and analysts. The order finds that Diageo failed to disclose the trends that resulted from shipping products in excess of demand, the positive impact the overshipping had on sales and profits, and the negative impact that the unnecessary increase in inventory would have on future growth. The order further finds that investors were instead left with the misleading impression that Diageo and DNA were able to achieve growth in certain key performance indicators through normal customer demand for Diageo’s products.
Without admitting or denying the findings in the SEC’s order, Diageo agreed to cease and desist from further violations and to pay a $5 million penalty.
I guess it was not so benign after all!
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