The Practical Corporate & Securities Law Blog

By Broc Romanek

Go to TheCorporateCounsel.net

 
At a Wednesday meeting, the FASB decided to delay rulemaking to expense options by six to nine months and hinted that it might use a model other than Black-Scholes. Board members argued over whether the valuation of stock options should be based on the contractual life of the option or the time period until the option expires.

Originally, the FASB hoped to propose rules by the end of 2003, but have now pushed back the target date to the first quarter of 2004. It hopes to adopt rules now in the third quarter of 2004. So far, over 350 companies have voluntarily stated that they will - or are - expensing stock options (albeit using different methodologies).

More evidence that some CEOs still don't quite get it. For $10 million, AIG settled an enforcement action with the SEC yesterday for marketing and selling an "income smoothing" insurance product to a public company. The SEC staff blasted AIG for not initially cooperating and sure enough, AIG's CEO criticized post-Enron regulatory initiatives as going too far in his acceptance speech for "CEO of the Year" back in July (see page A3 of today's WSJ). AIG is the largest provider of D&O insurance by far.

And don't get me started about the NYSE's governance structure. True, its not a public company but it does have all the earmarkings of a poster child for bad governance. A CEO who handpicks the board - and the compensation committee. A compensation committee who approves CEO compensation arrangements that it doesn't understand. A compensation committee comprised principally of CEOs from companies that have inherent conflicts of interest with the CEO by virtue of him being their regulator.

And finally, as noted by Nell Minow at the Business Roundtable panel on governance two days ago, the worst compensation committees are those that include CEOs from other companies. This is because these CEOs have an interest in perpetuating the cycle of mindblowing levels of compensation as compensation consultants primarily use benchmarking to advise about CEO compensation levels. The NYSE's compensation committee appears to solely consist of CEOs - and quite a few at that (6 or 7 as compared to 3-4 comp committee members at a typical public company; this is because the NYSE board has dozens of members, a governance "no-no" itself).

I caught up with Nell after the BRT panel and we have posted an interview with Nell Minow on the Status of Governance Reform.

posted by broc at 7:24 AM

 
Last week, at an ALI-ABA conference, I heard Dan Goelzer, PCAOB Board Member, speak and he noted that the PCAOB had received slightly over 200 registrations from audit firms so far. Audit firms need to register in order to be eligible to audit public companies. The deadline for registration is effectively now - even though October 22 is the deadline - because SOX provides the Board with a period of 45 days to review registration applications. And the PCAOB has specifically stated "U.S. firms that submit their applications after the first week of September might not receive approval by the Oct. 22 deadline." [Non-U.S. firms must register by April 19, 2004.]

What does this mean? It means that it is quite likely that numerous audit firms have decided to get out of the business of auditing public companies. Last year, over 700 audit firms had at least one public company client. Of this number, the Big 4 firms had over 95% of the market and the vast majority of these firms had only one or two public clients.

The cost of registering with the PCAOB is immense. The registration application is quite burdensome (over 100 hours to complete for a small audit firm) and the risk of getting slapped by a rapidly growing PCAOB staff and losing your reputation - all for one or two public clients - is is too high for these smaller audit firms. [At some point, the applications will be made public. I hear that a typical Big 4 application contains over one terabyte of data - you won't be able to download that over the Web.]

The upshot is that many small public companies are going to suffer and be forced to switch auditors. That is, if they can find one - at this conference, two panelists from the Big 4 mentioned that each of the Big 4 had shed "dozens" of clients recently as part of their quality control and due to higher fees that the client refused to pay. Now, this is a true cost of SOX.

For TheCorporateCounsel.net subscribers, Wachtell Lipton has updated its model pre-approval of non-audit services policy which we have added to our samples.
posted by broc at 7:04 AM

 

posted by broc at 6:20 AM

 
Okay, the SEC's Reg FD enforcement proceedings are getting more serious - Schering-Plough paid a $1 million fine and the former CEO/Chair paid $50k himself (with injunctions levied against both). This is the first Reg FD settlement with an individual.

The facts appear straight-forward on their face, private meetings with analysts who then downgrade and sell immediately. An interesting aspect of the SEC's press release is that the company executives conveyed their selective disclosure through a "combination of spoken language, tone, emphasis, and demeanor."

Before the Senate Banking Committee yesterday, SEC Chair Donaldson testified that state regulators endanger enforcement of securities laws when they fail to coordinate cases with federal prosecutors or his agency. He specifically cited Oklahoma prosecutors who filed an action against WorldCom two weeks ago - and before he testified, Donaldson noted that he wished Elliott Spitzer had given the SEC more notice regarding his mutual fund investigation.

Our first survey on "Reporting Up/QLCCs" was quite successful with over 175 responses, so we urge everyone to participate in our new Quick Survey on Individual Director Evaluations.

Thanks to Warren de Wied of Fried Frank for his excellent (and lengthy) analysis of the Breeden report, which is now available on GreatGovernance.com.
posted by broc at 6:36 AM

 
Last Friday, Microsoft filed its 10-K. You can't glean any new details about its restricted stock unit program or option arrangement with JP Morgan - but it does provide the retroactive application of SFAS 123 to expense options.

By the way, we have posted a partially "blurred" version of the most recent issue of The Corporate Executive - which contains 6 pages of comprehensive analysis into what Microsoft is doing - in the hopes that you will enter a "no-risk" trial (current subscribers can access the complete version online).

The SEC's August 2003 proposal regarding nominating committee activities would require companies to describe any specific, minimum qualifications that the nominating committee believes must be met by a nominee, any specific qualities or skills that the nominating committee believes are necessary for one or more of the directors to possess, and any specific standards for the overall structure and composition of the board. As proposed, this disclosure would be required in proxy statements.

Some companies already provide this type of information, either in the board's corporate governance guidelines or nominating committee charter. Now, some companies are providing their criteria in their proxy statements or posting it separately on a page of their websites. For example, Oracle provided such a description in its proxy statement filed yesterday and Johnson & Johnson has a separate web page explaining its criteria.

For TheCorporateCounsel.net subscribers, we have added two new pages to our Shareholder Access Portal - one describing how companies Disclose Director Qualifications and another that describes how companies are providing Instructions on How to Contact Directors.

For those that took a gander at the Procter & Gamble proxy statement I blogged about yesterday, did you notice that they appended seven committee charters and their corporate governance guidelines! Seven charters is a lot...could be the record...


posted by broc at 11:18 AM

 
As I blogged a few weeks back, the SEC's FAQs regarding auditor independence likely will cause many companies to revise their pre-approval of audit/non-audit services policies. As more fully laid out in our Pre-Approval Policy samples page, the FAQs make it clear that pre-approval policies can't provide for broad, categorical approvals (e.g., tax compliance services); that the pre-approval policies must be detailed as to the particular services to be provided; that the audit committee must be informed about each service; that monetary limits cannot be the only basis for the pre-approval policies; and that if the audit committee is presented with a schedule or cover sheet describing services to be pre-approved, a schedule must be presented with detailed back-up documentation regarding the specific services to be provided.

Now, Procter & Gamble has become the first company to post/file a policy since the FAQs were issued - and provides an indication of how much more the audit committee (or a delegated member(s) of the committee) is going to be involved than previously thought in pre-approving services. We will continue to add these policies to our Pre-Approval Policy samples page as they are made public.

For TheCorporateCounsel.net subscribers, we have posted an interview with Betsy Atkins about Life as a Professional Director.

posted by broc at 1:05 PM