The Trust Has Left the Building: $23,000 on Spa Treatments

It looks like the folks at AIG have taken "tone at the top" to heart. Unfortunately, their tone isn't of the type that is good news for taxpayers, who now own 80% of AIG. As this Washington Post article describes, two former AIG CEOs were grilled during a House Committee on Oversight and Government Reform hearing this week (one of whom received a $5 million performance bonus just before he left - in addition to a $15 million golden parachute - and another AIG executive was fired who still receives $1 million per month for consulting services). The former CEOs expressed no remorse for their actions that drove AIG into the arms of the government and didn't acknowledge making any mistakes. Rather, they blamed the accounting. The House committee members were visibly disturbed by the sheer audacity of these so-called corporate leaders. Given the long list of troubling practices at AIG described in this front-page WSJ article, we may well see these two in pinstripes someday.

The topper is the fact that AIG is now getting an additional $37.8 billion loan from the taxpayers, which is lumped on top of the $80 billion load the government provided last month. This came a day after it was revealed that the company held a junket for sales reps at a resort, spending unbelievable amounts of the taxpayer's money. How exactly does one spend $23,000 on spa treatments or $5,000 at the bar? The story is outrageous and listening to the radio, it's fair to say that AIG already has become the posterchild of all that is broken in Corporate America. If this doesn't get you mad, nothing will.

Reflecting on a True Corporate Leader

Kevin LaCroix does a masterful job reviewing the new uncensored - and authorized - biography of Warren Buffett in his "The D&O Diary Blog. In my opinion, Warren is one of the few leaders in Corporate America deserving of the title "leader." Reading Kevin's description, you can see that Warren values his reputation more than money. How many CEOs can you say that about?

It's worth noting that Warren's annual letter to shareholders is one of the only "straight talk" pieces out there when it comes to disclosure documents for shareholders. I've never understood why other CEOs haven't followed his lead. Just like few have followed his lead in the face of today's crisis to speak up, take actions to show they are accountable and try to produce calm.

So What Now? Does Board-Centric Oversight Really Work?

Given the events leading up to this crisis (and continuing today, see the AIG story above), there certainly will be a rash of regulatory reforms. It's clear that there are numerous practices that need fixing and right now, Corporate America doesn't seem capable of doing it on its own.

Exhibit A is excessive executive compensation. As I often state when debating defenders of today's pay packages, would you be motivated to work to 100% of your abilities if you made $10 million per year? If the answer is "yes," what purpose does paying you $20 million serve?

Apologists then trot out the argument that another company may pay you that $20 million - thus, your current employer should pony up. That may well be true in relatively rare circumstances - but the reality is that there are very few CEO superstars that could easily move from one company to another (just like there are few superstars in sports that could command top dollar from another team).

Boards continue the status quo of handing out oversized pay packages because it's the easy thing to do. Having that hard negotiation with a sitting CEO is tough to do - most directors have day jobs where they face tough situations every day and I imagine that it would be rough to go to a board meeting and continue fighting the good fight. But that is their job and they need to do it - or they need to drop off the board. As I blogged recently, I hear that the few companies that really make responsible changes are the ones where the CEO speaks up and voluntarily asks for the change. Sadly, boards and compensation committees are not the ones driving responsible change.

In the wake of the ongoing crisis, there may well be a push to dramatically alter the board-centric oversight model that exists today. In his most recent column, Jim Kristie of "Directors and Boards" looks at this topic, first noting Marty Lipton's speech defending the board-centric model from a few months ago, then pointing out that growing evidence of a lack of confidence in the board-centric model today and ending with the thought that "shareholder-centric governance may be one of the ways out of this financial crisis, widely thought to be the worst since the Great Depression."

Powerful food for thought. Are boards listening - and acting - to stave off this possibility? Like most others, I'm cynical at this point. My guess is that most would rather blame the accounting or short sellers than take responsiblity for their own oversight failures. True leadership is a rare commodity these days.

The Bottom Line: We Need Trust

I believe the reason that the government's daily solutions to the credit crunch are not working is because the trust within our system has evaporated. It is widely reported that banks refuse to lend to each other. The approval rating of our politicians are at historical lows.

And I wouldn't be surprised if many of the retail investors now leaving the stock market never return, particularly the older baby boomers who don't have the time to wait this out. And even though our markets are now dominated by institutional investors, their size often is attributable to participation by the masses. Look for their sizes to shrink as coffee cans are buried in the backyard. Without true leadership - setting the proper tone at the top and taking responsibility - I don't think this market will turn around. To start down the path to true leadership, CEOs can start by voluntarily reining in their excessive pay packages.

- Broc Romanek

Bailout Legislation and the Credit Crisis: Memos Galore

With many law firms suffering from a dearth of transactional work - compounded by the biggest market crisis of our generation - the sheer number of firm memos being produced has been overwhelming lately. Here is where we have been posting the hordes of memos related to the crisis:

- Memos re: Bailout Legislation
- Memos re: Implementing TARP (includes memos on Money Market Guaranty Program)
- Memos re: Fair Value Accounting
- Memos re: CDOs/Credit Default Swaps
- Memos re: SEC's Emergency Orders
- Memos re: Lehman Bankruptcy
- Memos re: Covered Bonds
- Memos re: International Developments

In addition, we have posted these memos regarding related developments on these sites:

- Memos re: Fed’s Rule Relaxation for Non-Controlling Bank Investments (on DealLawyers.com)
- Memos re: Executive Compensation Provisions in Bailout Legislation (on CompensationStandards.com)

Work on Congressional Fair Value Study Commences: Comments Solicited

The SEC has commenced its study on "mark-to-market" accounting - and is authorized by Section 133 of the Emergency Economic Stabilization Act - and is soliciting comment. The Act requires the study to be completed by January 2nd and the SEC must consult with Treasury and the Federal Reserve. Notably, the IASB announced that it believes last week’s SEC-FASB clarification on fair value is consistent with IAS 39.

Last month, Corp Fin Director John White and Deputy Chief Accountant James Kroeker (who is heading up the SEC's study now) gave this testimony on transparency in accounting before the Senate Banking Committee.

The Brackets: A "Credit Crunch" Pool

- Broc Romanek

Today's "21st Century" Roundtable: Another Ten Cents

A few weeks ago, I blogged about the SEC's new "21st Century Disclosure Initiative," including a summary of a proposal from Joe Grundfest and Alan Beller - as well as my ten cents on the entire idea. Today, the SEC is holding a roundtable on the idea - and has posted these FAQs and this strategic plan.

Trotting this new initiative out now seems like a bad idea when it won't really bear on any of the problems associated with the current credit crisis. Bizarrely, the SEC issued this press release yesterday that revised the title of this roundtable so it's framed as if it's dealing with transparency in the credit crisis (here is the original press release).

At least, this illustrates that the SEC understands the need to tackle the credit crisis topic - unfortunately though, this roundtable isn't about it. During the roundtable, if one was to hold a drinking game with "credit crunch" as the trigger term, I fear there wouldn't be much action outside of the Chairman's opening remarks. This perceived inaction by the SEC in the face of a major crisis will continue to provide fodder for folks like those over at "The Conglomerate" blog, which recently wrote a daily list of regulatory actions to combat the crisis - with the SEC penciled in as "The SEC did nothing." The SEC should be in crisis mode and setting aside any unrelated projects.

- Is This Project Dealing with "Form over Substance"? - When I read the SEC's strategic plan, I was disappointed that the direction of the initiative clearly seems to be in the vein of "form over substance." The SEC's vision of this project seems to consist of creating a "Company File System," where all the core information about a company would be in a centrally and logically organized interactive data file. When you read that description, a fair question might be: "Isn't that what Edgar does today?" And a straight-faced answer would be: "For the most part, yes."

As I mentioned in my last ten cents on this topic, I believe the SEC should be focused more on updating its substantive requirements - without that kind of meat involved in this project, I find the phrase "21st Century Disclosure Initiative" to be undeserving. This rulemaking simply doesn't carry that kind of importance and it's misleading.

Nothing personal about Bill Lutz (who is leading this initiative), but as his biography shows, he is an English Professor - and that's not the best background to lead us down the path to better substantive requirements. At this point, this is Chairman Cox's baby and I don't feel a heavy Corp Fin presence in this project - and it's supposed to be about disclosure.

- Why a "Hash Mark System" Might Not Work - Putting aside my reservations about the timing of this initiative, I do have some thoughts about a "Company File System." I think it's important for companies to be required to file their core information - whatever the format (ie. HTML, XBRL) - on a single government site that is common for all reporting companies, like EDGAR is today. It's very efficient to be able to go directly to one site and type in the name or trading symbol of a company and go directly to a company's filings.

One of the ideas being considered is that companies would fill out online questionnaires and then they wouldn't file their questionnaire responses directly with the SEC - rather they would post the responses on their own websites, with a ‘hash' that authenticates the document as well as the date and time of posting. I have three concerns regarding this idea:

1. Challenges of Maintaining Content - I think this "hash mark" idea may be challenging for companies to implement. They would be required to ensure that those links stay active. You would think that this would be easy to accomplish, but I find that companies change the URLs of their IR web pages much more frequently than you would think. (I know this because I try to maintain a list of links to the IR web pages of widely-held companies and it requires constant updating).

2. Security Considerations - Another consideration for companies is the fear that the "official" documents now required to be on their servers would get hacked.

3. Investor Trust - Finally, and most importantly, investor studies show that investors trust documents filed - and found - on a government website more than documents found on a company's site. Rightfully so, investors tend to view documents posted on corporate websites as marketing material.

The SEC: Under Fire

Even before Senator McCain was calling for SEC Chairman Cox to be fired, the SEC has been under attack. The latest is a claim that the SEC censored a report to hide its role in the Bear Stearns implosion. According to this Bloomberg article, the SEC's Inspector General released a report a few weeks ago that "deleted 136 references, many detailing SEC memos, meetings or comments, at the request of the agency's Division of Trading and Markets that oversees investment banks" (the SEC's IG also released this companion report regarding the SEC's broker-dealer risk assessment program). An unedited version of this report is posted on Senator Grassley's website.

The SEC's Inspector General has issued another report - also requested by Senator Grassley (see his letter from yesterday) - regarding the 2005 firing of Gary Aguirre, an SEC lawyer who claimed superiors impeded his inquiry into insider trading at hedge fund Pequot Capital Management. This report was released by the Senate Finance Committee yesterday, but is not yet posted on the SEC's website - the articles states that the report "said the agency should consider punishing the director of enforcement and two supervisors over the firing."

Perhaps in response to the pressure, Chairman Cox hired a former head of the Congressional Budget Office as a senior adviser yesterday - and according to this article, recently hired two new public relations officers.

Treasury Department: Implementing TARP ASAP

As required by the Emergency Economic Stabilization Act, the Treasury Department is moving quickly to choose advisers, issue regulations, and hire companies to serve as asset managers for its "Troubled Asset Relief Program" (known as "TARP").

The first big move by Treasury was issuing a number of interim guidelines (egs. asset manager selection process; conflicts of interests) - as well as three "solicitations for financial agents," which have a deadline for comments by 5:00 pm today.

Neel Kashkari - age 35! - has been named the interim head of the new Office of Financial Stability, which will implement the TARP (he was the Assistant Secretary for International Economics and Development and has been a key adviser to Hank Paulson). This office will hire a small staff with expertise in asset management, accounting and legal issues.

- Broc Romanek

Test Your Access for Our Upcoming Conferences

We thank the many of you who have registered to attend our upcoming conferences - to be held on October 21-22 – via video webcast: "Tackling Your 2009 Compensation Disclosures: The 3rd Annual Proxy Disclosure Conference" & "5th Annual Executive Compensation Conference." And of course, we thank the many of you coming to New Orleans - for you, here are check-in/breakfast instructions.

For those watching by video webcast, to ensure you don’t have any technical snafus for the conferences, please test your access today.

- How to Test: Use this link to test for access (this test is only available this week) by using your ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing problems, follow these webcast troubleshooting tips.

- How to Earn CLE Online: Please read these FAQs about Earning CLE carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Both Conferences will be available for CLE credit in all states except Pennsylvania (but hours for each state vary; see the list for each Conference in the FAQs).

When you test your access, you can test our CLE Tracker as well as input your bar numbers, etc. You also will be able to input your bar numbers anytime during the days of the Conferences too (remember that you will need to click on the periodic “prompts” all throughout each Conference to earn credit).

- How Directors Can Earn ISS Credit: For those directors attending by video webcast, you should sign-up for ISS director education credit using this form.

- How to Attend by Video Webcast: If you are registered to attend online, just log in to TheCorporateCounsel.net or CompensationStandards.com on the days of the Conference to watch it live or by archive (it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference” on the home pages of those sites will take you directly to the Conference.

More Companies Using Internal Pay Equity as Alternative Benchmarking

During our Conferences, some of the most respected compensation consultants will describe how companies can implement internal pay equity as an alternative to peer group benchmarking (see the Conferences' agendas). With so much attention right now on excessive executive compensation, we predict that this methodology will really take off over the next year given how existing peer group surveys are comprised of inflated data.

Some companies have already taken the leap. In its 2008 proxy statement for Cerner Corporation, the company discloses that it uses internal pay equity guidelines that provide that its "CEO’s total cash compensation shall not be more than three times that of the next highest total cash compensation (the company's board must approve any exception to these guidelines)."

My Ten Cents: Overcoming Objections to Internal Pay Equity

To the extent there is pushback from compensation consultants about clients using internal pay equity as an alternative benchmark to peer groups, I can understand it - because internal pay likely will reduce the level of the consultant's role in the pay-setting process. With internal pay, consultants can advise clients about how to implement internal pay equity methodologies, but they wouldn't make money for the use of their peer group database. This is because internal pay equity is an "internal look" at the company's own pay scale.

But for the life of me, I can't understand why lawyers would advise their clients not to consider internal pay equity. Over the past few years, peer group benchmarking has been criticized by many quarters. It's not that peer group analysis is not useful per se, it's just that the current batch of CEO pay data is tainted because most boards sought to pay their CEOs in the top quartile for 15 years - thus driving CEO pay inflation through the roof.

Given that most boards rely on peer group benchmarks as the paper trail to show that they were informed when exercising their fiduciary duties - and given that peer group benchmarking is now widely discredited - shouldn't lawyers be advising boards to find another source of documentation for their files? Or urging them to obtain at least an additional layer of protection by balancing peer group benchmarking with internal pay equity?

The old adage that "everyone else is doing it" simply doesn't work anymore with regulators and courts. Imagine a courtroom where several experts are brought in to show how peer group data is tainted and that everyone "should have known" it. It's easy if you try...

Learn how to implement internal pay equity from the resources in our "Internal Pay Equity" Practice Area on CompensationStandards.com.

- Broc Romanek

After the Bailout: What to Expect for Capital Market Deals Now

Want to know how your future looks in the wake of the bailout legislation? Tune in tomorrow for this webcast - "Latest Developments in Capital Market Deals" - to hear how the markets are functioning right now and what the future holds. The panel includes both an equity and a debt banker, as well as legal experts from the East Coast, West Coast and the Midwest. The panelists include:

- Edward Best, Partner, Mayer Brown
- Michael Kaplan, Partner, Davis Polk & Wardwell
- J. Maurice Lopez, Managing Director, Citigroup Global Markets
- Patrick Schultheis, Partner, Wilson Sonsini Goodrich & Rosati
- Bill Schreier, Head of Equity Capital Markets, BM Capital Markets

Coming Soon? Code of Ethics for Proxy Advisory Services

For the past few months, Meagan Thompson-Mann, a visiting fellow at Yale’s Millstein Center for Corporate Governance and Performance, has been soliciting comment regarding voting integrity in the proxy voting process in response to a draft study she drafted. Among other things, her study suggests a code of ethics for proxy advisory services and includes a proposed code. It raises the possibility of sharing information with companies, but leaves it up to the advisor (p. 21) - and it also provides that a proxy advisor should not give companies any assurances of a particular recommendation prior to its release (p. 15). Weigh in with your thoughts if you can.

RiskMetrics Begins Advising on Tender Offers

As I noted recently on the DealLawyers.com blog, RiskMetrics' ISS Division recently broke with tradition and advised its clients not to tender Longs Drug Stores' shares into CVS' tender offer. Historically, RiskMetrics has only made recommendations on shareholder votes and left tender offers alone. So changing the structure of a deal from a merger to a tender offer will no longer have the incidental effect of removing RiskMetrics from the equation...

- Broc Romanek