July 6, 2007

The SEC’s “Anti-Terrorism” Tool: Needs Some Work

Back in early 2004, as part of an omnibus appropriations bill, Congress has been requiring companies to disclose business activities in countries designated by the State Department as sponsoring international terrorism. Since then, Corp Fin’s Office of Global Security Risk has been gradually growing in size and issuing comments eliciting such disclosure (see this memo as well as #2911 in our Q&A Forum to better understand the specific rules that allow the Staff to seek such disclosure). And remember that SEC Chair Chris Cox served as the Chairman of the House’s Committee on Homeland Security before he came to the SEC (and often is rumored to be the next head of the Department of Homeland Security).

I was on the road last week when the SEC launched its new “anti-terrorism” tool, but just by reading the SEC’s press release, I guessed that it would be an imperfect “blacklist” and could mislead investors about which companies are truly doing business in countries associated with terrorists.

This opinion column from yesterday’s WSJ does a great job of explaining how my hunch appears to be right.

Here is an excerpt from that column, penned by Todd Malan, president of the Organisation for International Investment (which represents the interests of the roughly 1,200 foreign companies with US stock market listings):

“Under U.S. law, corporations listing on American capital markets must disclose ties to state sponsors of terror. Many (but not all) companies have been doing so for years, but without the wherewithal to comb through thousands of filings, investors are unlikely to be fully informed. In that light, the SEC’s Web tool appears a welcome response to those investors and policy makers who are hungry for such data.

Unfortunately, the SEC simply compiles a list of companies with the words “Sudan,” “Iran,” “North Korea,” “Syria” or “Cuba” in their annual reports without regard to context.

The SEC’s tool could easily mislead investors. For example, Baker Hughes, a company on the SEC’s Sudan page, states in its 2006 annual report that its subsidiaries will ‘prohibit any business activity that directly or indirectly involves or facilitates transactions in Iran, Sudan or with their governments, including government-controlled companies operating outside of these countries.’ In other words, Baker Hughes withdrew from Sudan nearly two years ago.

Another company on the SEC’s Sudan page, Immtech Pharmaceuticals, appears because it conducted clinical studies for the treatment of first-stage African sleeping sickness in Sudan. We hope this isn’t the sort of corporate behavior the SEC would define as “subsidizing a terrorist haven or genocidal state.’

Not only has the SEC named and shamed the wrong companies, it’s missed many with significant operations in countries like Sudan. Not one of the companies generally identified as enabling the Sudanese government’s genocidal capacity appears on the SEC list even though some (such as PetroChina) list on U.S. capital markets.”

Last Chance: Early Bird Discount Extended Until July 20th

In the wake of the mad rush for last week’s Early Bird deadline, we have decided to extend the deadline – just this once – until July 20th. So this is your last chance to take advantage of a nice discount on the Member Appreciation Package to catch these three October Conferences by video webcast:

– “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference” (10/9)
– “Hot Topics and Practical Guidance Conference: The Corporate Counsel Speaks” (10/10)
– “4th Annual Executive Compensation Conference” (10/11)

[Media Oddity: Detroit rocker Ted Nugent pens an opinion column for WSJ. Egads.]

Disclosing Spousal “Leisure Activities”

Mark Borges continues to do excellent work in his blog. Here is an item he blogged about on Tuesday: Joann Lublin had an interesting article in Saturday’s Wall Street Journal on executive spouses who get to enjoy corporate perquisites (see “For CEO Spouses, Corporate Jets are the Perfect Perk” (subscription required)). Using the disclosures in this year’s proxy statements, she writes about how the families of top corporate officials often get to indulge in many of the perquisites and other personal benefits provided to the executives.

One particular item – leisure activities – caught my eye since Alan Dye and I had spoken about this in our session about perquisites at last year’s Proxy Disclosure Conference. This is one of those tricky areas, where the disclosure decision often turns on the tiniest of details.

As I recall, we highlighted several of the challenges in determining whether the ancillary activities (such as spa treatments or sightseeing trips) provided to spouses who attend a business-related function are disclosable perquisites. Take, for example, a typical situation where a company’s senior executives attend a Board of Directors’ retreat at which golf and other recreational events are paid for by the company. Frequently, the executives’ spouses also attend the retreat, with the company incurring expenses for their airfare, meals with the directors, and “leisure activities.”

To me, these events raise two questions: are the executives’ recreational activities considered a perquisite and, even if not, what about the activities for the spouses?

While any perquisites analysis is going to be situation-specific, I typically start with the assumption that the executives’ leisure activities are related to the business purpose for the event. In the case of spousal activities, I start from the opposite end of the spectrum, and assume that they should be considered perquisites. Of course, in both cases, I have to apply the SEC’s “directly and integrally related” test to the specific facts. If, ultimately, I conclude that the activities constitute a personal benefit to the named executive officer then they will need to be included as part of his or her total compensation if aggregate perquisites exceed the $10,000 disclosure threshold, and quantified if their incremental cost to the company is $25,000 or more (which is highly unlikely). For an example of a company that included spousal “leisure activities” as part of its executives’ perquisites disclosure, see the Rockwell Automation proxy statement (see footnote 1).

The other question that comes up here is whether describing a spa experience as a “leisure activity” is sufficient for disclosure purposes. I think it is. The Adopting Release only requires that a company’s perquisite description give investors a sense of the particular nature benefit received – it doesn’t seem necessary to me to disclose whether the spouse spent an hour in the amethyst steam room or received a hot stone massage.

– Broc Romanek