Yesterday, we posted a practice pointer on CompensationStandards.com from Paul Hodgson of The Corporate Library about a company which has paid a total of $500 million to three separate CEOs over the past decade. Yes, this is an extreme (and our October 20th conference is not about extremes – it is about practical guidance for all the situations that are not extreme) – but it is quite a shocker and makes for interesting reading.
Most importantly – particularly considering the SEC’s interest in this area recently (ie. likely to be more GE-like SEC Enforcement disclosure actions) – Paul notes this amount includes a $21 payment related to the huge $111 million “golden hello” that he previously had not been aware of – the $21 million was paid to a GE subsidiary to buy Wendt out of his confidentiality agreement and it had not been disclosed in the company’s proxy statement or in the filed employment contract. But Paul did manage to dig out a tiny paragraph disclosing the amount in a massive pre-bankruptcy Form 10-K.
NYSE Proposes Procedures for SEC Filing Deficiencies
Yesterday, the SEC proposed an amendment by the NYSE that would codify existing procedures followed by companies that fail to timely file their annual reports with the SEC (i.e. 10-Ks, 20-Ks, etc.; doesn’t apply to the glossy annual reports). According to the proposal, once a company has been notified by the NYSE that it is late:
– Within 5 days of receipt of this notification, the company would be
required to (a) contact the NYSE to discuss the status of the annual
report filing, and (b) if it has not already done so, issue a press
release disclosing the status of the filing.
– If the company fails to issue this press release in a timely manner, the NYSE would itself issue a press release stating that the company has failed to timely file its annual report with the SEC.
– During the 9-month period from the filing due date, the NYSE would monitor the company and the status of the filing, including through contact with the company, until the annual report is filed.
– If the company fails to file the annual report within 9 months from the filing due date, the NYSE would be permitted, in its sole discretion, to allow the company’s securities to be traded for up to an additional 3-month trading period depending on the company’s specific circumstances.
– If the NYSE determines that an additional trading period of up to 3 months is not appropriate, suspension and delisting procedures would commence.
A member emailed me to share the NYSE’s interpretation of Section 303A.07(c)regarding the requirement that the audit committee discuss the annual/quarterly financial statements and MD&A. The comment period for the NYSE’s proposed amendments ends today.
The member asked the NYSE Staff to clarify a concern regarding the proposed change to Section 303A.07(c)(iii)(B) that inserts the phrase “meet to review and” before the current requirement “to discuss” – because he was worried that the audit committee will now be required to “meet” to review specific MD&A disclosures.
In response, the NYSE Staff stated that it interprets the existing standards – not the proposed standards! – to require audit committees to review a “relatively advanced” draft of MD&A at a meeting. These meetings can be held telephonically. This interpretation comes despite the fact that it is probably not readily apparent that the NYSE had always contemplated that audit committees would be holding meetings to review specific MD&A disclosures under Section 303A.07.
As you know, many companies schedule committee meetings (including audit committee meetings) around the regular board meeting schedule. Some companies have board meeting schedules that don’t coincide conveniently with the earnings press release and the Form 10-Q/K filing schedules. Such companies typically schedule two meetings of the audit committee each quarter: one to address the earnings release (including the financial statements) and another to review the Form 10-K/Q drafts. These meetings often are held telephonically.
During their second meeting, audit committees will discuss disclosures to be made under MD&A, but are unlikely to have a draft of the complete Form 10-K/Q filing – including MD&A – available at that meeting because it isn’t ready yet. In such instances, the practice is to discuss disclosures under MD&A generally and instruct management to circulate a draft to committee members as soon as possible. Committee members then are given an opportunity to comment on the draft and discuss it with management, but an additional meeting is not held. Apparently, those days are over and audit committees might have to hold a third meeting to review a “relatively advanced” draft of MD&A – or a more likely solution, push back the second meeting until the MD&A is sufficiently specific.
SEC Issues SAB 106 for Oil & Gas Companies
Yesterday, the SEC issued SAB 106 to express the Staff’s views regarding the application of FASB Statement 143, Accounting for Asset Retirement Obligations, by oil and gas producing companies following the full cost accounting method.
The Coming Non-Qualified Deferred Compensation Legislation
Today is the NASPP webcast – The Coming Non-Qualified Deferred Compensation Legislation – featuring Bill Sweetnam of the U.S. Treasury Department and Max Schwartz of Sullivan & Cromwell, who will explain how this legislation is still very much alive – and the dramatic impact it will have on equity compensation!
Last May, a panel of the Ninth U.S. Circuit Court of Appeals in San Francisco voted 2-1 to reject the SEC’s argument that $37.6 million in termination pay and bonuses to two top officials of Gemstar TV Guide International were extraordinary payments that must be frozen while the executives were under suspicion of cooking the company’s books. This was the SEC’s first attempt to use new Section 1103 of Sarbanes-Oxley to freeze termination payments that it felt was extraordinary.
On Friday, a majority of its 25 judges voted to grant the SEC’s request for a rehearing before an 11-judge panel. No date has yet been set for the rehearing.
The big battle is over what is deemed an “extraordinary payment” – something that some of our Executive Compensation Task Force members have addressed through their practice pointers on CompensationStandards.com.
– What responsible ways (and yardsticks) can be used to structure each component of top executives’ compensation, including cash compensation, bonuses, stock compensation, retirement plans, severance and more
– What types and levels of compensation are now appropriate for CEO pay – and how to identify them
– What should be the role of surveys regarding CEO pay; including how to overcome the problems of defining peer groups
– How to critically evaluate survey data and avoid the pitfalls of benchmarking – red flags and nuggets
– How to implement internal pay equity methodology
The Future is Here – SEC Proposes Voluntary Use of XBRL
Yesterday, the SEC posted both a concept release and a proposing release regarding the voluntary tagging of EDGAR data to make the data more “fungible.” Fungible is probably the best way to describe XBRL – because it is derived from eXtensible Mark-up Language (known as “XML”), a coding language that allows for the creation of individual “tags” for specific elements in structured documents.
Using XBRL, each item in a financial statement is individually tagged based on a “taxonomy,” or agreed-upon system of classification. With the tags working behind the scenes, companies can create financial statements that investors can easily manipulate. In other words, investors will be able to more easily compare “apples” to “apples” when comparing the financials of different companies.
Even before this voluntary program – that the SEC hopes to launch early next year – Microsoft, Morgan Stanley and Reuters have made their financials available in XBRL. Here are some FAQs that I drafted about XBRL back on my old site.
It is important to recognize that the Fannie Mae and Computer Associates stories that filled Friday’s papers effectively boil down to the same root problem – senior management massaging earnings to enable them to hit targets that create bigger payouts for themselves. To illustrate this point, the Friday NY Times contained a table that displayed the millions of dollars that Fannie Mae managers would not have earned if they hadn’t tweaked their numbers.
Notably, on Thursday, Fannie Mae filed a Form 8-K explaining how the employment agreements with its senior managers had been amended to refine the definition of “cause” in the event of termination – and that upon a termination for cause, a manager is only entitled to accrued base salary.
From a shareholder perspective – and the executive’s own fiduciary perspective, as highlighted in the Sept-Oct issue of The Corporate Counsel - more companies should be revisiting existing employment agreements to alter cause definitions and severance payment calculations. And not wait until the roof falls in to do so! Remember, by showing they sought to protect shareholders, making such changes now will help directors avoid personal liability and reputational harm.
– Obligations to re-examine, modify existing arrangements
– Fixing and adding “cause” provisions and clawbacks
– Ways to address current excessive compensation and how to have a difficult conversation about rolling back pay
– How to implement meaningful holding periods for outstanding equity compensation
– How to avoid traps for the unwary director when negotiating employment contracts and other compensation arrangements
8-Ks and Director Compensation
The Sunday NY Times contains an article about how 8-Ks are now providing executive compensation details sooner – but as noted by Ron Mueller on Thursday’s webcast, even director compensation details are being disclosed in 8-Ks. For an example, see this Form 8-K filed by Quidel Corp.
As for the Sunday NY Times article, my cursory review of those “sooner” disclosures doesn’t necessarily reveal any “fuller” disclosures…
Right before yesterday’s popular 8-K webcast (audio archive available now; transcript in about a week), we posted a new 30-page inhouse 8-K policy. Among other features, it includes a description of the roles for each member of the disclosure committee and a great process flowchart.
SEC Brings Enforcement Action over GE Compensation Disclosures
Picture proof that you don’t want to miss Alan Beller’s lunchtime speech at the October 20th Executive Compensation Conference – and hear how the SEC is getting tough over compensation disclosures – is yesterday’s settlement with GE over the failure to fully describe the substantial benefits it had agreed to provide Jack Welch under an employment and post-retirement consulting agreement.
If you read – and you should read it! – the administrative proceeding release, you will get the sense of how Enforcement appears to be upset with disclosure counsel’s role in this action. In addition, Enforcement doesn’t appear happy with how the GE board of directors accepted the lowball estimate of the value of Welch’s retirement benefits.
I know that I prattle on about the October 20th Conference - but if you are disclosure counsel, you should realize that this conference is for you; it is not just for benefits counsel. Evidenced by the SEC’s GE action and the pending Tyson Foods action (not to mention the judiciary and the IRS activity in this area), the regulatory and liability standards in this area are changing right now – and you are at risk.
It is akin to how we all became corporate governance experts two years ago – compensation is what truly drives the governance bus and this conference (along with the CompensationStandards.com resources) will bring you up-to-speed quickly. So join the 400+ that have already registered for the conference – in person or by webcast – by registering now and gain immediate access to CompensationStandards.com!
A common question these days is what should my Section 404 management report look like? I hear that the national offices of the Big Four are working on forms for what they would like to see from their clients – but they have not released these forms yet. In the meantime, we have posted some sample management reports that companies have voluntarily filed as well as model forms from the AICPA (these are posted in our Sample Document Library and Internal Controls Practice Area). Thanks to Bob Hayward of Kirkland & Ellis for the heads up!
From what I’ve gleaned from the PCAOB releases, these reports should be pretty short and conclusory – more like an auditor’s letter than a full-blown, detailed report, as Auditing Standard No. 2 does not seem to contemplate a detailed discussion of what happened during management’s assessment and testing.
Perhaps a more interesting question is whether the Big Four will develop checklists of the types of issues they will seek during their assessment process, or what type of records they will create to evidence the diligence performed to support their attestations.
Today’s 8-K Webcast
Thanks for the scores of questions for “Reality Bites: More on the New 8-K Rules” – I hope to extend the program beyond the hour slated for the webcast and have the panel answer as many as we can. Had one good suggestion to change webcast title to “Real Time Bites”!
I finally changed my blogging software – so that my blog entries are now word-searchable and you can also register to receive emails when I blog. Still tweaking the “look and feel” for the next few days. Kool Aid Man says “Oh yeah!”
Tackling This Year’s Auditor Engagement Letter
I am receiving lots of questions regarding strong-arming from the Big Four (aka the “Mighty Big Four”) during negotiations over auditor engagement letters, including issues regarding:
– Getting auditors to agree that their providing materials to the PCAOB or the SEC does not constitute a waiver of any privileges or doctrines available to the company or its counsel
– Getting clients comfortable with the dispute resolution mechanism
– Getting notice from auditors if the PCAOB requests documents relating to the audit of the client
Please let me know if you have any thoughts on these subjects – there appears to be a real need to share on this one…
Although putting together a tally sheet is not as simple as it sounds in theory (i.e. adding up the various components of a senior managers compensation package), we are excited to add a very practical tool to CompensationStandards.com – an Excel spreadsheet to use as the basis for your tally sheets. This Comprehensive Tally Sheet was contributed by Task Force members Matt Ward of Aon Compensation Consulting and Joshua Lurie of eComp Data Services Groups.
Yesterday, the Corp Fin provided its first update to the Telephone Interpretations Manual in years – when the Office of Mergers & Acquisition addressed the topic of unbundling under Rule 14a-4(a)(3). This update is in the fifth supplement to the Telephone Interpretations Manual.
The Staff decided to provide this interp after watching companies throw the kitchen sink into merger proposals – including significant corporate governance and anti-takeover provisions. Apparently, the straw that broke the camel’s back was an attempt by Comcast/AT&T Broadband to include what was referred to as an “atypical governance proposal” – a provision that eliminated the election of directors for three years – in their merger proposal.
The new interp lays out when unbundling is required (and when it’s not mandated). According to the interp, unless immaterial, matters should be unbundled on a ballot if:
– the provisions in question were not previously part of the company’s charter or bylaws;
– the provisions in question were not previously part of the charter or bylaws of a public acquiring company; and
– state law, securities exchange listing standards, or the company’s charter or by-laws would require shareholder approval of the proposed changes if they were presented on their own.
Comparison of Rights of First Refusal and First Offer
For those of you tracking the crop of 8-Ks filed since the new rules took effect last month, my vote for the most bizarre (and immaterial) goes to Energas Resources. Is there such a thing as a non-8-K? If so, this would be one. Please email me if you find other interesting 8-Ks.
Last call for you to submit questions so that I can present them to our expert webcast panel this Thursday regarding “Reality Bites: More on the New 8-K Rules.” Not surprisingly, I already have received hundreds of questions (many are duplicative; some are not) and we will do our best to address as many as we can.
My email address is firstname.lastname@example.org (or click on “Contact Broc” on the left side of this blog).
Impact of Sarbanes-Oxley on Non-Profits
Some practitioners are surprised to learn that certain provisions of Sarbanes-Oxley apply to all companies, including non-profits. Of course, most SOX provisions don’t apply to non-profits – but non-profits increasingly are taking steps to voluntarily comply with more provisions.
In my interview with John Corrigan on the Impact of Sarbanes-Oxley on Non-Profits , John provides specific examples of non-profits that voluntarily have taken steps to comply with various aspects of Sarbanes-Oxley.
Yesterday, Corp Fin issued its third Staff Legal Bulletin on shareholder proposals – SLB 14B. The big news is that Corp Fin has followed-up on its warnings and “clarified” its views on Rule 14a-8(i)(3) – which is the exclusion basis for false and misleading statements – by creating a more objective and higher standard for companies that seek to modify proposals and supporting statements.
Noting that nearly half of no-action requests now argue for modification under (i)(3) – which is a huge resource drain for Corp Fin – the Staff has narrowed (i)(3) so that it will only entertain modification of proposals and supporting statements if a company argues that they are materially false and misleading under the following 4 categories (the labels are mine):
1. Reputation Killer - statements directly or indirectly impugn character, integrity, or personal reputation, or directly or indirectly make charges concerning improper, illegal, or immoral conduct or association, without factual foundation
2. Objectively False Fact - the company demonstrates objectively that a factual statement is materially false or misleading
3. Crazy – the resolution contained in the proposal is so inherently vague or indefinite that neither the stockholders voting on the proposal, nor the company in implementing the proposal (if adopted), would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires — this objection also may be appropriate where the proposal and the supporting statement, when read together, have the same result
4. Unrelated Supporting Statement - substantial portions of the supporting statement are irrelevant to a consideration of the subject matter of the proposal, such that there is a strong likelihood that a reasonable shareholder would be uncertain as to the matter on which she is being asked to vote
The SLB also contains a list of circumstances under which it won’t entertain (i)(3)
arguments anymore, such as unsupported or disputed facts, opinions, or facts that companies don’t like. The bottom line is that companies now face a much greater burden of proof to convince the Staff that something is false and misleading – so warn your CEO and IR officers now that next year’s proxy statement may contain language that they don’t like.
The SLB also contains a reminder about how to draft defect notices, such as pulling directly from Rule 14a-8(b). It addresses when supporting legal opinions should be submitted – and how it might entertain requests that don’t meet the 80-day deadline in Rule 14a-8(j) for “good cause.”
How the Staff Processes No-Action Requests
The final part of Staff Legal Bulletin 14B sheds light on how Corp Fin processes no-action requests – and this includes some interesting items, such as:
– Since all materials are eventually placed in the public domain, the Staff seeks all arguments in writing and states that it won’t discuss substantive matters over the phone.
– The Staff might fax a response – rather than mail it, which often means that commercial databases find it first – if you include all your contact info as well as all the contact info of the proponent. In other words, if you want it faxed – which you do so that you find out first what the response is – obtain the proponent’s fax number and provide that to the Staff.
Stock Ownership Guidelines With “Hold ‘Til Retirement” Provisions
On CompensationStandards.com, we have posted two new practice pointers from Robbi Fox regarding “hold ’til retirement” stock ownership guidelines – one that is a survey and one that lists companies that presently have such provisions in their guidelines. To see all the practice pointers we have posted, see this chronological list that you can check under the “Practice Pointers” button on the home page.
To access these pointers today, register for the October 20th Major Compensation Conference now!