March 31, 2005

CEOs of the Dow 30 Agree to Cut Salaries By 20%!

Okay, that title is my (lame) idea of an early April Fool's joke - but here is a real NY Times article on inflation of salaries due to benchmarking. From the Museum of Hoaxes, here are the Top 100 April Fool's Day Hoaxes of All Time. I like #4, when Taco Bell bought the Liberty Bell.

Jack Welch Defends His Retirement Perks

Last night, in an interview with Dan Rather on "60 Minutes Wednesday," Jack Welch defended the retirement perks that he eventually gave up and became the basis for last year's settlement with the SEC. Jack explained how he rejected $300 million worth of restricted stock near the end of his term as CEO, opting instead for the lifetime continuance of perks that became controversial when the scope of them were fully disclosed in his divorce proceedings. A video archive of the interview is available, including footage with Jack's new wife.

Fairchild Executives Cut Pay to Settle Compensation Lawsuit

A few months ago, on, we posted a complaint filed in Delaware that alleged breaches of fiduciary duty and disclosure regarding the way the CEO and other executives were being compensated. According to this article in the Washington Post, the company and defendant officers have settled the lawsuit by cutting their pay and discontinuing some questionable practices.

Bloomberg Entering the Legal Database Market?

According to the Maryland Daily Record, Bloomberg intends to challenge Lexis and Westlaw by entering the legal database market. I can't find anything on Bloomberg's site to confirm this March 25th article.

March 30, 2005

SEC Issues Option Expensing Guidance

Yesterday, the SEC's Office of Chief Accountant issued SAB 107 regarding the FASB's option expensing standard. SAB 107 adds a new Topic 14 to the SAB series regarding Statement 123(R) and amends portions of some existing topics - as well as addresses a range of disclosure issues, from MD&A to non-GAAP measures.

As noted in the SEC's press release, "Among other things, SAB 107 provides interpretive guidance related to the interaction between Statement 123R and certain SEC rules and regulations, as well as provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. SAB 107 also reminds public companies of the importance of including disclosures within filings made with the SEC relating to the accounting for share-based payment transactions, particularly during the transition to Statement 123R."

In addition, the SEC's Office of Economic Analysis posted this interesting memo regarding valuation and the economic impact of option expensing.

Don't forget next week's timely NASPP webcast - "What You Need To Know About Option Valuation" - which is the 3rd webcast from the NASPP on this important topic during the past few months (archives of the other webcasts are still available, including practical remarks from FASB staffers).

GAO Criticizes Security Measures at the SEC

According to a 29-page report released last week by the Government Accountability Office, computer security at the SEC is lax enough to put financial - and personnel - information at risk. The problems cited in the report run the gamut, from not implementing effective electronic access controls to weaknesses in other information system controls (including physical security, segregation of computer functions, and application change controls).

According to a Washington Post article on Friday, the SEC responded by pledging to address the issues by June 2006. A spokesman said the SEC already has installed "intrusion detection systems" and replaced firewalls.

Personally, I am always amazed that there have not been any reported hacks of the EDGAR system - as that has to be one of the most popular targets of the hacking community, even for the youngsters for whom it's just a sport. It is easy to imagine the harm that could be caused by someone that hacked EDGAR (e.g. post a fake 8-K with some drastic news that is a market-mover).

April E-Minders is Up!

We have posted our April issue of E-Minders - as well as this interview with Denise Annunciata on State Law Research.

Posted by broc at 05:22 AM
Permalink: SEC Issues Option Expensing Guidance

March 29, 2005

Severance Arrangements Under Fire after 9th Circuit Decision

Last week, in SEC v. Gemstar-TV Guide International, the 9th Circuit ruled en banc that severance payments - at least those in the 5x base salary range - are "extraordinary payments" under the meaning of Section 1103 of Sarbanes-Oxley. Notably, the concurring opinion proposes that it should be interpreted even more expansive.

The impact of this important decision on executive compensation practices should be felt soon, as compensation committees will want to consider this decision - together with the Section 304 clawback provision - to determine whether they have met their fiduciary obligations. For example, Art Meyers of Palmer & Dodge raises these questions that all compensation committees should now consider:

- Should companies avoid entering into severance arrangements after a restatement?

- Should compensation agreements provide for an automatic freeze if there is a

- Is this yet another reason why comp committees should hire consultants to determine in advance what similar performing peer group companies are doing?

- If a company agrees to limit its severance to 2.99x base salary plus bonus unless shareholder approval is obtained - as many institutional investors are now demanding - does that create a de facto "safe harbor" for purposes of 1103?

We will continue to post practice pointers on these questions on in our "Severance Arrangements" and "Clawback Provisions" Practice Areas. The 9th Circuit decision is available in the "Comp Litigation" Portal.

ISS Issues 52 FAQs on its Compensation Policies

To further help companies - and investors - understand how it intends to recommend votes on compensation issues, ISS issued these 52 FAQs last week.

Audit Fees Continue Their Upward Trend

According to an article in Friday's WSJ, a survey comprising of most of the Dow 30 revealed a 40% increase in audit fees disclosed compared to the prior year. Part of that increase is because internal control costs are now included in the "audit fee" bucket rather than "audit-related," but the overall trend of rising audit fees should come as no surprise.

My Podcasting Experiment

Probably because I love the microphone so much, I am dying to get in on the ground floor of "podcasting." Heavily covered in the NY Times during the past month, podcasting is merely the posting of a series of audio files. Probably to make it seem more glamorous, the media likens podcasts to radio broadcasting.

Not anything of substance, here is my inaugural podcast. The ones to follow will be in the form of audio interviews with experts on hot and interesting topics - perhaps with occasional dalliances off-the-beaten path - wonder what Johnny Depp is doing?

March 28, 2005

SEC Brings 1st Reg FD Case for Reaffirmation of Expectations

In the first case involving a company reaffirming its previous expectations for earnings, the SEC announced Thursday that it had settled Reg FD charges against Flowserve Corporation, its CEO and its Director of Investor Relations. In the face of this complaint, the company and the CEO consented to pay civil penalties of $350k and $50k, respectively, and the Company, CEO and IR Director consented to a cease-and-desist order. This also is the first time an IR officer was part of an SEC action regarding a Reg FD violation.

The Facts and Allegations: In late September '02, the company lowered it '02 calendar-year annual earnings forecast - which it then confirmed in its 10-Q filed on October 22. The SEC alleged that at a private meeting of the CEO and IR Director with analysts on November 19, the CEO reaffirmed this earnings guidance in response to a question (during which the IR Director was silent).

On November 20, one of the analysts issued a report distributed to First Call subscribers stating that the company had reaffirmed earnings guidance, and on the following day, the stock went up about 6% on increased trading volume. After the close of that day, November 21, the company filed an 8-K reporting that it had reaffirmed its guidance in a conversation with analysts.

The company had a disclosure policy to respond to questions about "comfort" with guidance as follows: "Although business conditions are subject to change, in accordance with Flowserve's policy, the current earnings guidance was effective at the date given and is not being updated until the company publicly announces updated guidance."

The SEC found that the IR Director did not caution analysts prior to the meeting as to what topics were off-limits for their discussion with the CEO - and did not reiterate the company policy at the meeting.

What The Case Means: This case should help resolve the ongoing debate about how much time is acceptable since the company last gave public guidance to make a private reaffirmation. I believe someone from the SEC Staff said a while ago that confirming a month later clearly would be a problem and this case proves that point.

Some law firms had been suggesting one week is the rule of thumb to use, but I am not sure that many companies followed that guidance. Factors to consider include where is the company in its earnings cycles (ie. it's safer to confirm guidance in the first half of a quarter than in the second) and whether there have been any intervening circumstances since the company's last public guidance or reaffirmation (ie. would these intervening circumstances likely cause a reasonable investor to question the continued accuracy of the last estimate).

Until we hear more from the SEC Staff, a safe rule of thumb might now be that a week is okay, but longer can be risky (depending on the circumstances, of course) - any confirm creates risk and the longer the time lapse, the greater the risk. This area is ripe for a webcast now and I am "on it."

PCAOB to Consider Standard Regarding Corrections of Internal Control Material Weaknesses

On Thursday, the PCAOB will hold an open meeting at 10 am to consider proposing a standard that would permit, but not require, auditors to report on a company’s assertion that it had eliminated a previously reported material weakness in its internal control over financial reporting.

Wal-Mart's Vice Chair Resignation and the Federal Sentencing Guidelines

On Friday, as disclosed in a Form 8-K under Item 5.02, Wal-Mart's Vice Chair resigned - and 3 employees were fired - following an internal probe of misappropriated funds; somewhere between $100k-$500k of personal reimbursements, payment of third-party invoices and the use of company gift cards falsified by the Vice Chair (who was the 2nd highest executive officer until he retired in January).

Keith Bishop notes that the interesting aspect of this development is that it appears that Wal-Mart has taken to heart the November 2004 amendments to the federal sentencing guidelines. By conducting an investigation and terminating the Vice Chair, it appears that the company is meeting the sentencing guideline requirement that its compliance program is enforced through "appropriate disciplinary measures for engaging in criminal conduct."

March 24, 2005

Latest Analysis of Post-Omnicare Cases

For M&A practitioners, Omnicare - and what it really means - continues to be a heated topic. Learn more in this interview with Dan Sternberg on Delaware Applying Narrow Interpretation of Omnicare.

Easier Company Searches on EDGAR

Good news! There is a handy new feature on the SEC's EDGAR company search page that allows you to search by ticker for the largest 1500 publicly traded companies.

Martha and Her D&O Insurance

From page F-34 of the Martha Stewart Living Omnimedia 10-K under "Related Party Transactions":

"Martha Stewart has submitted a claim, pursuant to the Corporation's By-laws, for approximately $3.7 million, for reimbursement of certain expenses relating to her defense of the count of the federal criminal complaint against her alleging she made false and misleading statements intended to influence the price of the Corporation's stock. Ms. Stewart's defense of this count was successful and a judgment of acquittal was entered in her favor. The Corporation and Ms. Stewart submitted the question of whether or not she is entitled to indemnification to an independent expert on Delaware law. On March 15, 2005 the independent expert determined that Ms. Stewart is entitled to indemnification. The Corporation believes that any amount to be reimbursed to Ms. Stewart will be reimbursable to the Corporation under its Directors & Officers insurance policy and, accordingly, does not believe that the payment will result in an expense to the Corporation."

Tune in for our webcast - "D&O Insurance Today" - on April 13th to learn how D&O insurance practices are changing and what you should do about it!

Posted by broc at 05:46 AM
Permalink: Latest Analysis of Post-Omnicare Cases

March 23, 2005

Where is the Pay-for-Peformance?

Yesterday, the lead article in the Washington Post Business section heavily criticized the increasing gap between pay and performance for CEO pay.

Quoted in the article, Harvard Professor Lucian Bebchuk continues to get high marks for his "Pay for Performance" book, which we recommend as "must" reading for directors to understand the lay of the land today in this critical area. Professor Bebchuk has contributed a number of items to, including these practice pointers on retirement benefits and study on growth of executive pay.

More on Recapture of Incentive Pay

Looks like another reader of the NY Times had a similar reaction to mine after reading last Sunday's article on the recapture of bonuses (see my blog of 3/15) - below is his letter to the editor:

To the Editor:

The explanations offered by the corporations featured in your article ("Sorry, I'm Keeping the Bonus Anyway," March 13) for not pursuing the recovery of bonuses paid to executives that turn out to have been improperly paid ring hollow to any experienced commercial litigator. If a contract says that you get a bonus if certain numbers are reached, and they aren't, you aren't entitled to the bonus. It makes no difference if it is paid as a result of either mistake or fraud - it has not been earned. And recovering it cannot be noncost effective, unless the lawyers choose to make it so; these are not hard cases, and boards owe it to shareholders to pursue them.

Patrick T. Collins
Short Hills N.J., March 14

Also noteworthy is that Monday, in an interview carried in the USA Today, the Staples' CEO stated this:

Q: Should boards insist on "clawing back" incentive pay when it turns out a company's results were overstated?

A: Absolutely. There's an obligation to claw back ill-gotten gains.

SEC Issues FAQs on XBRL Filing

Yesterday, the SEC issued these FAQs on filing in XBRL in the EDGAR voluntary filing program. It's unknown which companies are participating in this voluntary program at this time.

Posted by broc at 06:34 AM
Permalink: Where is the Pay-for-Peformance?

March 22, 2005

Conflicts of Interest in M&A

On Sunday, the NY Times ran this article about conflicts of interest in M&A transactions, with a particular focus on fairness opinions as the NASD is in the process of reviewing comments on its proposed reform. Author Andrew Sorkin concludes, "Wall Street may initially blanch at these reforms, but they could turn out to be a boon for business: companies are more likely to ask for second and third opinions from different banks just to cover themselves - and that could produce fairness opinions that are really fair."

Don't forget that on April 20th, our star-studded panel will cover fairness opinions and much more in this webcast - "Conflicts of Interest and Dicey Engagements" - featuring Peter Douglas of Davis Polk; Brian McCarthy of Skadden, Arps; Kevin Miller of Credit Suisse First Boston; and Morton Pierce of Dewey Ballantine.

Confidential Treatment Requests for Material Contracts

Members tell me that the SEC Staff continues to take a proactive approach in its review of confidential treatment requests for information contained in material contracts and arguably has recently enhanced its scrutiny in determining what may be kept confidential. Learn more in this interview with Jim Ball and Ellie Kwack on CT Requests for Material Contracts.

Time Warner Pays $300 Million to Settle SEC Fraud Action

Yesterday, the SEC charged Time Warner with materially overstating online advertising revenue and the number of its Internet subscribers, and with aiding and abetting three other securities frauds. The SEC also charged that the company violated a Commission cease-and-desist order issued against AOL in 2000. In a separate administrative proceeding, the SEC charged Time Warner's CFO, Controller, and Deputy Controller with causing violations of the reporting provisions of the federal securities laws.

Time Warner settled its charges for a whopping $300 million (which is in addition to a separate $210 million settlement reached in December with the Justice Department) and the 3 officers entered into cease & desist orders, while the investigation continues into other entities and persons. The company also agreed to restate its financials and engage an independent examiner to determine whether the company's historical accounting for certain transactions was in conformity with GAAP.

Posted by broc at 05:39 AM
Permalink: Conflicts of Interest in M&A

March 21, 2005

Magnitude of Form 12b-25 Filings

As predicted, the number of companies filing Form 12b-25s in order to delay their 10-Ks past the March 16th due date reached a record level this proxy season. Here are some stats derived by Brink Dickerson and his team over at Troutman Sanders:

- Form 12b-25s filed between 3/1 and 3/17: 395 this year; 116 last year
- Form 10-Ks filed between 3/1 and 3/17: 2469 this year; 2607 last year
- Percentage of late filers: 16.0% this year; 4.4% last year

These stats do not reflect companies who were able to complete their traditional audit work and therefore file on time - but are taking advantage of the extension for their 404 work. As a result, the 395 number probably slightly understates the magnitude of the problem, which is amazing as the numbers above already indicate a 250% increase!

Deja Vu - WorldCom Directors Settle Again

On Friday, a new $55.25 million settlement with 11 former directors (including one estate) in the WorldCom class action lawsuit was announced, following settlements entered into with the underwriter defendants. If approved, the settlement calls for settling directors to pay $20.25 million of their own money and insurers to pay $35 million.

The prior proposed settlement with directors included a so-called "ability-to-pay" provision that would have limited the amount by which any verdict or judgment against a non-settling defendant would be reduced with respect to the responsibility of settling defendants had there been no settlement, by the financial capability of settling directors to pay. The lead plaintiff terminated the proposed settlement because the Court rejected that provision as being inconsistent with the PSLRA. The new proposed settlement does not have such a provision, reflecting the fact that the lead plaintiff has now reached settlement with all of the underwriter defendants.

The settlement provides that the payment made by each settling director will equal or exceed the compensation received for service as a board member since January 1, 1999, unless the parties otherwise agree based upon unique circumstances. Here is a related NY Times article.

AFL-CIO "Key Votes" Scorecard

Last week, the AFL-CIO released this key votes scorecard. The 28 shareholder proposals on the scorecard from 28 different annual meetings will be used to grade the voting performances of mutual fund managers. See how the AFL-CIO graded managers last year in this report, as well as this special report grading how the 10 largest managers voted on compensation-related shareholder proposals.

The "Bloggies"

Last week, the 5th Annual "Bloggies" were held, with winners in 30 different categories. Here is the site where the principal winners are noted. Here is a Washington Post article about the awards.

Speaking of blogging, lots of press recently about CEOs and directors blogging, such as this Washington Post article from Saturday. As I mentioned in this article from Corporate Board Member, what a nightmare for in-house counsel to ensure that these corporate bloggers are not violating Reg FD, etc. Leave the blogging for the unattached...

Posted by broc at 05:33 AM
Permalink: Magnitude of Form 12b-25 Filings

March 18, 2005

Research Analyst Participation in Road Shows

Last week, the SEC proposed amendments from the NASD and NYSE that would revise their research analyst conflict-of-interest rules (NASD Rule 2711 and NYSE Rule 472) that would go further than the terms of the '03 Wall Street Global Settlement. Specifically, the proposed rules would:

- prohibit a research analyst from participating in road shows and communicating with a customer in the presence of investment banking department personnel or company management about an investment banking
services transaction;

- prohibit investment banking personnel from directing a research analyst to engage in sales or marketing of an investment banking transaction or to engage in communicating with a customer about an investment banking services transaction; and

- require that any written or oral communication by a research analyst with a customer or internal personnel related to an investment banking transaction must be fair, balanced and not misleading.

Transcript for "The Evolution of Due Diligence Practices"

We have posted the transcript for the webcast: "The Evolution of Due Diligence Practices (and Securities Act Liability)."

More Cowbell!

With the 10-K deadline behind us, I couldn't resist a little humor. I am not a big Saturday Night Live fan, but the old SNL skit with Will Ferrell and Christopher Walken is one of the funniest I have ever seen! "I got a fever... and the only prescription is more cowbell."

Here is a transcript - but you want to view this free video if you can. Of course, you can now buy a "More Cowbell" T-shirt, mug, bib, etc.

March 17, 2005

Thinking About Trying XBRL?

If your company is considering participating in the SEC's XBRL pilot program - or you want to just learn more about XBRL - check out this interview with Michael Ohata, who is Director, Business Reporting of Microsoft Corporation.

Microsoft is one of the few companies that has been making filings with the SEC using quasi-XBRL; "quasi" since EDGAR doesn't accept XBRL until April 4th (which is the new start-date that was recently pushed back) but Microsoft and a few others were able to manevuer to accomplish this feat. Recently, the SEC posted this announcement regarding support for XBRL filers.

Survey on Pre-Approval of Non-Audit Services

To help answer some member questions regarding the level of detail provided to audit committees to support non-audit service decisions, we have posted a new survey on pre-approval of non-audit services. Please weigh in by going to home page and clicking on the survey in the middle column.

Are Gross-Ups Appropriate?

Yesterday, the WSJ ran this article analyzing existing gross-up practices related to executive severance payouts. I respect former SEC Commissioner Wallman as much as I respect anyone - but have to politely disagree with the sentiment attributed to him that "gross-ups are a necessary means of attracting top executives and have become a common feature of compensation agreements at Fortune 500 companies."

Isn't that the type of "herd" mentality that got the accounting and investment banking industries into all the hot water (i.e. billions paid in settlements) they can bear? Aren't phenomenal severance payouts a questionable enticement for CEOs to do bad deals? What valid purpose do gross-ups serve?

I agree with a lot of the investor guidelines that urge compensation committees to limit severance payouts to one-times salary - NOT including all the other components of compensation that often make these gross-ups "necessary." And investors typically feel the same way that the Council of Institutional Investors do about gross-ups - here is what CII's comp policy states: "Companies should not compensate executives for any excise or additional taxes payable upon the receipt of severance, change-in-control or similar payments."

Posted by broc at 05:18 AM
Permalink: Thinking About Trying XBRL?

March 16, 2005

They Finally Got Their Man!

Former WorldCom CEO Bernie Ebbers was finally found guilty for his role in the massive fraud on his watch, as a slow-moving jury found him guilty yesterday on all counts. The verdict was a major victory for Justice Department prosecutors who spent nearly three years investigating the $11 billion fraud. Here is a Reuters article that includes my over-the-top quote on this important conviction.

Many of you will remember that the desire for reform legislation had all but died in Congress in mid-summer '02 until WorldCom collapsed. Then, within a few short weeks Sarbanes-Oxley was enacted, capped by an unanimous vote in the Senate. All of us can thank Bernie for the job security and late nights in the office...

CalPERS Changes Its Voting Policies

As they indicated they would do late last year, CalPERS modifed its proxy voting guidelines regarding non-audit services. Under last year's controversial guidelines, CalPERS automatically withheld its proxy votes from all members of audit committees that hired outside auditors to perform non-audit services.

Under the new guidelines, effective for this proxy season, CalPERS intends to withhold support for audit firms, rather than individual directors. However, CalPERS would retain power to seek the removal of a director in cases where "egregious" conflicts of interest have occurred.

This LA Times article states, "Switching to the new criteria should lead CalPERS to withhold votes against auditors at only about 5% of the companies in which it owns stock, CalPERS staff estimated. Auditors would be opposed by CalPERS if they were found to violate protocols outlined in proposed audit independence rules being drafted by the Public Company Accounting Oversight Board set up by the Sarbanes-Oxley Act of 2002."

Job Choice & Changes

With my unique background (trifecta experience of law firm, inhouse and government), I often get asked for my advice about job changes and opportunities. To help those mulling their prospects - either within their present organization or outside - I have compiled some materials in our new "Job Choices/Changes" Practice Area.

Posted by broc at 05:33 AM
Permalink: They Finally Got Their Man!

March 15, 2005

Last Batch of Internal Control Disclosure Samples

With the 10-K deadline looming, here is the last batch of samples:

1. Material weaknesses leading to ineffective internal control:

- SpatiaLight
- Retek
- Dynegy

2. Using 45-day extension:

- Insurance Auto Auctions
- Citizens & Northern Corp.
- ATS Medical (warning that they will report a material weakness)

3. Using the special exclusion for Variable Interest Entity (VIE) under FIN 46:

- Brandywine Realty Trust

Thanks to Bob Dow, who has been indispensable during these trying internal control times!

The Recapture of Bonuses

The article in Sunday's NY Times did a great job questioning the wisdom of so many companies not having clawbacks in their employment arrangements so that companies (and their shareholders to whom managers and boards owe fiduciary duties!) can reclaim any incentive awards paid out to managers who inflated the company's results so that targets were met.

It is refreshing that at least one company - see this 8-K from International Paper - recently has revisited its long term incentive compensation plan to make it clear that the company can "recover compensation paid to a participant in cases of a restatement of the company's financial statements due to errors, omissions or fraud." I would love to hear of more examples if you see them!

Tears Shed for John Chevedden

On the other hand, I wasn't enthusiastic about this article in Sunday's NY Times that was sympathetic to frequent proponent John Chevedden because his holdings at some companies dipped below the requisite $2000 eligibility level found in Rule 14a-8 (so those companies were able to successfully exclude his shareholder proposals because he was not eligible to submit proposals).

The $2,000 floor is meant to relieve companies from bearing the burden of time and expense of dealing with shareholders with nominal holdings; many that have dealt with Mr. Chevedden know that their shareholders would not be happy if they knew how much of a burden he can be (despite the fact that he selects proposal topics that often receive majority votes).

Analysis of SEC's Section 21(a) Report in Titan

I am excited to see how others fare in the "Nuggets" format, as Rick Climan of Cooley Godward, Joel Greenberg of Kaye Scholer, and Wilson Chu of Haynes and Boone work their magic during tomorrow's webcast: "30 M&A Nuggets in 60 Minutes."

And I have received a number of questions for Brian Breheny, Chief of the SEC's Office of Merger & Acquisitions, who will open this webcast by explaining the SEC's Section 21(a) Report regarding Titan, which asserts that potential liability exists under the Exchange Act for publication of false or misleading material disclosures regarding material contractual provisions such as representations.

March 14, 2005

More Internal Controls Sample Disclosures...

As the appetite for internal control disclosure samples seems insatiable, here we go:

- Glenayre Technologies' 10-K - uses the 45-day extension, hints that it may not be able to meet the extended date, and gives an extensive risk factor.

- Calvary Bancorp's 10-K - uses the 45-day extension indicating that management is not aware of a problem

- Gorman Rupp's 10-K - gave itself a "not effective" opinion based on a material weakness related to one of its subsidiaries

- Maxtor Corporation's 10-K - has ineffective internal controls and as a result, ineffective disclosure controls (also has a risk factor re: the control problems)

- Bassett Furniture's 10-K - Here's a good sample using the 45-day extension for non-accelerated filers (there are a few bad ones out there, with no conclusions. Be careful!)

"Steps to Take" Transcript is Up!

On, we have posted the transcript from the popular webcast: "Steps to Take: How to Avoid Director Liability After WorldCom, Enron and Disney."

ISS Announces Position on Shareholder Proposals Re: Majority Vote Requirements

Late last week, ISS issued a new voting policy outlining how they intend to generally support non-binding proposals seeking majority vote requirements in boardroom elections. The overarching rationale for the change was that "implications of 'Majority Vote' proposals are potentially far-reaching, as they could recast the way in which directors are elected."

ISS has created a resource center on majority-vote proposals, that contains its new policy on this issue and a transcript from a roundtable on the topic from last month.

It is notable that the Carpenter's union recently withdraw its majority-vote proposal at ten companies because they all agreed to sit down with union representatives in a work group to study the feasibility of majority elections for corporate directors. This development follows the formation of the related ABA Majority/Plurality Voting Task Force that I blogged about on February 25th. In addition, we have just posted Marty Lipton's memo on majority vote provisions in our "Shareholder Access" Practice Area.

Disney's Succession

Although CEO succession is one of the board's primary tasks, I would argue that its the least understood - and most challenging - of the board's duties. This is reflected during the recent controversy over Eisner's successor at Disney, who was selected over the weekend to be inhouse candidate Robert Iger. Now, dissidents Stanley Gold and Roy Disney believe that Eisner railroaded the succession process and have released this statement calling for removal of the entire board and saying "Mr. Mitchell's approach to good governance is no better than a carny at the fair, enticing words but in the end the game is rigged."

The lack of understanding is also reflected in the fact that I have only seen one article written about CEO succession in my five years as editor of the Corporate Governance Advisor and managing all these websites. Learn more about CEO succession in our "CEO Sucession" Practice Area.

March 11, 2005

And Even More on Lease Accounting!

I've heard that the Big 4 may be split on the issue of whether restatements caused by lease accounting are an indication of a material weakness, with two firms saying that they were going to look at this on a case by case basis applying a SAB 99 type materiality analysis to the impact of the restatement on the periods restated (apparently taking the view that while it would be material if taken all in one period, it was not material to any restated period and therefore not a material weakness) and the other two firms seem like they are inclined to take the view that essentially any lease accounting restatement results in a determination of a material weakness.

Here are two companies that just filed their 10-Ks with lease accounting restatements and clean 404 opinions: Office Depot and J Jill.

The restaurant industry is one of the industries impacted by issues raised in the SEC Chief Accountant's letter on lease accounting (see my "SEC Speaks" notes regarding how OCA views its letter), as reflected by a recent letter from the National Restaurant Association to the SEC that I have heard about through the grapevine.

To see what two restaurant companies recently disclosed about their internal controls in their 10-Ks, see the two new additions to our "Internal Controls - Deficiencies and Weaknesses Identified" page.

Exhibits to 10-K Regarding Executive Compensation

I have been getting quite a few questions on what to do about exhibits to the 10-K relating to compensation events/data - such as director compensation, setting of NEOs salary (both for those NEOs with and without employment agreements), bonus related items, etc. So I have pulled some examples from 10-Ks filed recently and put them in a new "Form 10-K Disclosure" Practice Area on

'33 Act Reform

At last week's "SEC Speaks," the Staff indicated that the vast majority of the comments received on the '33 Act reform were supportive. Here are the comment letters, including the one from the ABA submitted last week. The biggest areas of comment fall into three categories: (1) liabilities; (2) electronic road shows; and (3) disclosure of outstanding comments in '34 Act reports.

Learn more about the reform in this interview with Valerie Ford Jacob on Securities Act Reform.

Posted by broc at 06:18 AM
Permalink: And Even More on Lease Accounting!

March 10, 2005

Audit Committee Reports Addressing Internal Controls

In the Nov-Dec issue of The Corporate Counsel (p.8), Mike Gettelman suggested that companies use their Audit Committee Report to discuss their internal controls' process and costs. Below are some companies that have made such disclosure in their Audit Committee Reports, but none of these go as far as Mike recommends (i.e. none of these examples disclose the level of time and money spent):

- Sonoco
- Morgan Stanley
- Corning
- Qualcomm
- Invitrogen

I am surprised that not more companies are making this disclosure so far, particularly given Linda Griggs observations on this topic made at the end of her interview with me conducted a few weeks back.

More Sample Internal Control Disclosures

We continue to update the laundry list of companies that have disclosed material weaknesses in our "Internal Controls - Deficiencies and Weaknesses Identified" page (which is available in our "Internal Controls" Practice Area).

Here are a sampling of this samples: In its Form 10-K, Informatica voluntarily discloses a signficant deficiency in its report, but its controls are still effective. And Mim Corporation discloses in its Form 10-K that it has an adverse opinion because its internal controls aren't effective due to material weaknesses, including an ineffective audit committee!

Trust Preferred Developments

Last week, the Federal Reserve Board released its final rules on the capital treatment of trust preferred securities and other capital instruments. The rule largely reflects the Fed’s May 2004 rule proposal and comprehensively integrates prior Fed guidance on capital instruments, particularly those issued by bank holding company subsidiaries.

We have created a new "Trust Preferred Securities" Practice Area that include law firm memos on the Fed's new rules as well as a host of other resources.

March 09, 2005

Notes from PLI's "SEC Speaks" Are Up!

In our "Conference Notes" Practice Area, we have posted extensive notes from PLI's "SEC Speaks in 2005." Thanks to Julie Hoffman for her continued hard work!

The Evolution of Due Diligence Practices (and Securities Act Liability)

Don't forget tomorrow's webcast - "The Evolution of Due Diligence Practices (and Securities Act Liability)" - during which Bob Buckholz of Sullivan & Cromwell; Joe McLaughlin of Sidley Austin; and Michael Kaplan of Davis Polk will analyze how diligence practices are evolving in the wake of the WorldCom, the first major court opinion to affect diligence practices in decades.

The 2005 GE Proxy Statement

On Friday, General Electric filed its proxy statement and here is what Mark Borges of Mercer blogged about in his "The Compensation Disclosure Blog" on

Each year, this proxy is chock full of interesting and innovative disclosures, and this year is no exception. Some of the highlights from my initial pass through the report:

- A thorough description of the compensation and benefits for non-employee directors, including charitable gifts and the use of GE appliances under the company's Executive Products Program. (The proxy statement also describes the company's liability insurance coverage for directors, which is rarely, if ever, mentioned by companies in their director compensation disclosure.)

- Comprehensive disclosure of all related-party transactions, including a statement by the company that it believes the disclosed transactions were reasonable and in the best interests of the company.

- A description in the Board Compensation Committee Report of all of the components of executive compensation considered in reaching decisions about the specific compensation elements and total compensation paid or awarded to GE's senior executive officers.

- A discussion of each element of the company's executive compensation program, broken out by compensation type - base salary, annual bonus, stock options/restricted stock units, career retention RSUs, performance share units, contingent long-term performance awards, and perquisites.

- Extensive disclosure of the various perquisites and other personal benefits for executive officers. The discussion includes the following statement on the company's executive security program:

"We believe the security costs described in this paragraph are legitimate business expenses, but we also recognize that all of these costs can be viewed as personal benefits. In the interests of full disclosure, we are treating all of these costs as personal benefits for these executives and have reported them as such in the “Other Annual Compensation” column in the {Summary Compensation] table . . . ."

I like the way GE handles this issue. While the company's stance is at odds with the SEC staff's position, it avoids a dispute by providing the disclosure anyway (which conforms with its past treatment of security-related benefits). I suspect that some companies that consider security-related travel to be a business expense opt not to provide the disclosure.

- The BCCR also contains specific discussions of (i) the company's stock ownership requirements for senior executives, (ii) the company's stock holding period requirements, (iii) the company's position on stock option expensing (it has expensed options since 2002), (iv) the company's policy prohibiting stock option repricing, (v) the disposition of outstanding stock appreciation rights in anticipation of the American Jobs Creation Act and new Section 409A, (vi) the company's policy on the use of employment and severance agreements, (vii) the company's policy to seek shareholder approval of severance arrangements for any of the Named Executive Officers under certain circumstances, and (viii) the company's Section 162(m) policy.

- The Summary Compensation Table is very easy to read, extending over two full pages and includes several features seen in prior years' proxy statements, including a "Total Annual Compensation" column and a break out of the "All Other Compensation" amounts in the table itself (rather than in a footnote).

- A statement in the footnote on executive perquisites indicating that the amounts reported for personal use of corporate aircraft for 2002 and 2003 differ from the amounts reported in prior proxy statements because the company has changed the way it calculates the incremental cost for personal use of the aircraft. Starting in 2004, the company now includes only those variable costs incurred as a result of personal flight activity in the calculation, and excludes non-variable costs, such as exterior paint and interior refurbishment, which would have been incurred regardless of whether there was any such personal use.

- Disclosure of the range of above-market interest rates contingently credited on salary deferred by the NEOs.

While some of the items listed above were first introduced in last year's proxy statement, GE continues to refine and improve its disclosure each year. They really do a good job of taking the compensation program of a truly complex company and making it readable and informative.

Posted by broc at 06:31 AM
Permalink: Notes from "SEC Speaks" Are Up!

March 08, 2005

For 404 Delay, When Do You Determine Accelerated Filer Status?

When the SEC granted the extension to non-accelerated filers and foreign private issuers last week - delaying the implementation of Section 404 by one year per my blog of March 3rd - the SEC Staff received several calls on the status of issuers that are not currently accelerated filers, but who become accelerated filers at some point before the implementation date of July 15, 2006.

At PLI's "SEC Speaks" on Friday, the Staff confirmed that those filers must be in compliance with 404 at the time they become an accelerated filer. In other words, they do not get to take advantage of the delayed implementation date.

Disclosure of Corporate Political Contributions

Over the past few years, a number of bills have been floated on the Hill to require disclosure regarding corporate political contributions - but none of them have gotten the requisite support. The Center for Political Accountability has been fighting for this cause for two years and recently released a report entitled "The Green Canary: Alerting Shareholders and Protecting Their Investments." Read more in this interview with the Co-Directors of the Center.

For Warren Buffett Fans Only!

Berkshire Hathaway has posted a copy of its 2004 Annual Report, including Warren's famous letter to shareholders. One oddity is the fact that Warren personally has copyrighted his letter to shareholders - can he do that? If he writes the letter in his capacity as chair of the board, doesn't his work inure to the benefit of the company?

In his letter, Warren's sage advice about evaluating a company's prospects includes asking this question about the CEO: "Is he/she overreaching in terms of compensation?"

Am I a Journalist?

Yesterday's NY Times carried two interesting items on blogging. One article regarding whether bloggers can be protected under state law to protect their confidential sources. The other article noting that a 23-year old blogger had obtained permission to attend White House press briefings (after extensive attempts to procure the press pass - read about the saga on his blog).

For the first few years of blogging, I didn't consider myself a journalist in the least. I still don't think I qualify in the traditional sense - but I sometimes refer to myself as a journalist when I try to explain to relatives what I do or try to distinguish myself in this town chock full of lawyers...

March 07, 2005

Corp Fin "Staff Alert" on Annual Reports

On Friday, Corp Fin posted a Staff Alert regarding Annual Report Reminders. The Staff Alert deals with:

- Disclosure of Previously Unreported Form 8-K Events

- Correct Version of the Certifications Required by Rules 13a-14(a) and 15d-14(a)

- Placement of the Internal Control Reports

- Auditor Consents

So it looks like we can now add "Staff Alerts" to the forms of written informal SEC Staff guidance that are available (joining Staff Legal Bulletins, FAQs, no-action letters, Current Issues Outline, telephone interps, etc.).

SEC Chair Speaks About Executive Compensation

On Friday, SEC Chair Donaldson gave a speech at SEC Speaks and he said this about executive compensation: "Some conflicts are best managed by focusing on how they are disclosed to investors. For example, the executive compensation process presents clear potential conflicts and clear potential for abuse. Yet, as I have said on many occasions, the solution is not to have the SEC or any regulator set compensation. Good disclosure can do a lot to address this conflict. One problem is that there has not been good enough disclosure under current rules.

The Division of Corporation Finance has been looking at this, and the Commission has brought cases in this area. This is an area where I have been disappointed by the contribution of some lawyers, who appear in at least some cases to devise their own narrow interpretations of the rules while disclosing as little as possible, rather than to seek helpful disclosure for investors. A second issue in this area is that our rules may need to be refocused, and the Division of Corporation Finance is exploring how they can be enhanced and clarified."

In his comments, the Chairman also focused on other areas of attorney responsibilities as borne out in this article in the Washington Post.

NYSE Tweaks 303A FAQs

On Friday, the NYSE changed one of the FAQs that it had released late last week (ie. ones that I blogged about on Friday). In footnote 1 to the FAQs, the NYSE explains how the CEO/CFO cert. disclosure requirement in 303A.12(a) refers to the most recently filed 10-K; not the prior year's 10-K.

Posted by broc at 05:02 AM
Permalink: Corp Fin "Staff Alert" on Annual Reports

March 04, 2005

Implications of SEC's Action Against Titan on Mergers

On Wednesday, the SEC announced a settled enforcement action against Titan Corporation alleging Foreign Corrupt Practices Act violations for funneling approximately $2 million towards the election campaign of Benin's then-incumbent President. The amount of this settlement - $15.5 million in disgorgement and prejudgment interest and a $13 million penalty - is the highest ever paid for FCPA violations.

However, the most significant aspect of this proceeding is a Section 21(a) Report of Investigation that asserts that representations in an agreement filed as an exhibit can be actionable by the SEC if they are materially false. This assertion relates to a FCPA representation made by Titan in a Merger Agreement with Lockheed Martin (my alma mater!), which was also publicly disclosed in Titan's proxy statement (since the Merger Agreement was in the proxy statement). It is noteworthy that the Report does not allege a violation by Titan of Sections 10(b) or 14(a) - or Rules 10b-5 and 14a-9 - and that the SEC has not charged Titan with such violations.

The Report recognizes that Titan shareholders were not beneficiaries of the FCPA Representation in the Merger Agreement, but states that the inclusion of the Representation in a disclosure document filed with the SEC, "whether by incorporation by reference or other inclusion, constitutes a disclosure to investors." The Report goes on to say that disclosures regarding material contractual terms such as representations may be actionable by the Commission. The Commission will consider bringing an enforcement action if it determines that "the subject matter of representations or other contractual provisions is materially misleading to shareholders because material facts necessary to make that disclosure not misleading are omitted."

NYSE Speaks on 303A Requirements

In response to a number of inquiries regarding the 2005 disclosure requirements in Section 303A of the NYSE Listed Company Manual, the NYSE has posted some FAQs, including:

- All disclosures required by Section 303A and/or Rule 10A-3 must be included in any specified document distributed in 2005.

- Incorporation by reference of any required disclosure is not permitted.

- Failure to include any Section 303A required disclosure in the specified document or inappropriately incorporating a disclosure by reference is considered material non-compliance and as such is a Section 303A.12(b) reportable event of non-compliance. Companies that have inadvertently failed to make the required Section 303A.12(a) disclosure in this year’s annual report should consult their Exchange Corporate Governance specialist regarding necessary action.

- Companies must identify which directors are deemed independent and disclose the basis for that determination.

- Categorical standards of independence, if adopted, must be disclosed, not incorporated by reference.

- The proxy must also include a discussion of any relationships considered by the board in determining a director’s independence, unless the company had adopted categorical standards, in which case, the relationship need only be disclosed if it falls outside of the categorical standards.

- This year’s annual report to shareholders must disclose that the company submitted a Section 12(a) CEO Certification to the NYSE last year. Companies need only reference that the previous year’s CEO Certification was submitted to the NYSE. The text of the certification need not be included in the annual report.

- If the previous year’s CEO Certification was qualified in any way, the company must disclose that qualification.

- Section 303A.12(a) also requires that companies disclose in this year’s annual report whether or not they filed with the SEC the CEO/CFO certification required under Section 302 of Sarbanes-Oxley in the prior year as an exhibit to their Form 10-K. The text of the certification need not be included in the annual report.

To review law firm memos on the NYSE's latest changes to its standards, go to the "NYSE Guidance" Practice Area.

SEC Commissioners Continue Internal Dissension

Yesterday, the SEC approved the PCAOB's 2005 budget, but the WSJ reported that over the objections of SEC Chair Donaldson, the two Republican Commissioners, Glassman and Atkins, extended a written invitation to PCAOB Chair McDonough and FASB Chair Herz, to take part in yesterday's open Commission meeting. Both did not attend.

I agree with the comments of Commissioner Campos - as reported in the WSJ - that having a Q&A with these two chairs doesn't serve any real purpose. Commissioner Atkins spent quite a bit of time - nearly 45 minutes - going through each item in the proposed budgets, I guess to create a record. And there is no requirement for the SEC to consider the PCAOB and FASB budgets at an open Commission meeting - they can do it seriatim. Probably better done that way...

March 03, 2005

Internal Controls and Lease Accounting

Following up on my blog of February 24th, I have been hearing from various members that the SEC, PCAOB and Big 4 are still kicking around how to treat the restatements caused recently by the SEC Chief Accountant's letter on lease accounting for purposes of internal controls (i.e. whether it should be deemed to be a "material weakness" or simply a "significant deficiency.") The magnitude of the impact of this letter was explored in yesterday's article in the WSJ regarding the high number of restatements (carried on page B2A in the East Coast edition, but not available online for some reason).

With only a few weeks to go until 10-Ks are due for calendar-year companies, the stakes are high and time is short. Here are examples of the arguments being made by companies as to why their restatements for lease accounting shouldn't be considered material weaknesses:

- There is no change in net cash flow. Although the balance sheet/income statement impacts of the correction of the “error” frequently aren't material, auditors have told companies that they should consider the impact on their cash flow statements of the correction of the errors - as cash flow is shifted from one category to another - to be material if it would exceed the imaginary 5% threshold for material (which for a lease-intensive company it readily could).

- This is precisely the type of situation that PCAOB had in mind when it drafted PCAOB Auditing Std. No.2, ¶ 140 to provide that a restatement is only a “strong indicator” of a material weakness rather than an irrefutable presumption. The commentary allows some judgment here – see ¶¶ E95-E98 – but auditors are so intensely risk adverse that they are not exercising their judgments in this (or similar) situations.

- Companies do not think certain aspects of the SEC Chief Accountant's letter have clear support in SFAS 13 and its progeny, particularly the concept that pre-occupancy leasehold build-outs always constitute “rent.” A number of companies also were not thrilled with the tone of the WSJ article or the quotes from the SEC. There were so many companies that were accounting for leases inconsistently with the SEC’s interpretation – and all of the Big Four were signing off on that accounting – that clearly they were not doing it intentionally wrong.

Some companies are preparing their draft 404 disclosure both ways in the hope that the SEC/PCAOB will say before the 10-K due date that it is okay for the Big Four to take the position that a "miss" on this issue is not a material weakness.

New 404 Deadline for Non-Accelerated and Non-US Filers

Yesterday, the SEC announced that it is extending the deadline for non- US and non-accelerated filers regarding 404 reports and auditor attestations. The SEC pushed out the deadline by one year, so that these filers now will have to include these documents in their first annual reports filed on - or after - July 15, 2006. For these types of companies, the year-long extension also applies to the rules requiring maintainance of internal control over financial reporting, periodic evaluation of changes in internal controls, and related changes to 302 certifications.

FYI, nearly 200 members have responded to our survey on the location, format and content of 404 reports - see the running results.

Analysis of Latest Compensation Proxy Disclosures

With so many of our members in the thick of drafting and reviewing proxy statement compensation disclosures - particularly compensation committee reports - we have posted this "Special Proxy Disclosures Supplement" on As can be seen from the table of contents of the special supplement below, members should not miss Mark Borge's daily commentaries and pointers on good/bad disclosures and practices in “The Compensation Disclosure Blog.”

· The Morgan Stanley Compensation Committee Report - A Reprise
· Goldman Sach's Aircraft Policy
· Intel’s 10-K Equity Disclosure
· A Model SERP Disclosure
· Do You 162(m)?
· American Express’ Fulsome Disclosure
· Tally Sheets Makes an Appearance
· Disclosing Option Grant Values

Posted by broc at 05:19 AM
Permalink: Internal Controls and Lease Accounting

March 02, 2005

Steps to Take: How to Avoid Director Liability

Join us tomorrow on - Thursday, March 3rd - for this important webcast – “Steps to Take: How to Avoid Director Liability After WorldCom, Enron and Disney” – during which an all-star panel will provide specific “how to” practical guidance, including examples of actions companies should consider taking now to protect their directors. Join these experts:

· John Olson, Partner, Gibson Dunn & Crutcher LLP
· Marty Lipton, Partner, Wachtell Lipton Rosen & Katz LLP
· Frank Balotti, Partner, Richards Layton & Finger LLP
· Rich Koppes, Of Counsel, Jones Day and Director of two NYSE-listed companies (Apria Healthcare Group and Valeant Pharmaceuticals International)

CEO/CFO Certification Reminder

I've noticed several accelerated filers who recently have filed 10-Ks without the requisite internal control language in paragraph 4 of their certifications (i.e., including a reference to internal controls). Accelerated filers were permitted to omit that paragraph until now - companies that are not accelerated filers can still omit it. For an example of what the 302 certifications should now look like, see our Sample 302 Certifications.

New Global Regulator of Auditing Standards

On Monday, the Public Interest Oversight Board (PIOB) was formed to oversee the public interest activities of the International Federation of Accountants (IFAC). This new global regulator was formed by the International Organization of Securities Commissions (IOSCO), two other international regulators (banking, insurance), the World Bank and the Financial Stability Forum.

Notably absent from the founders is the PCAOB (which oversees auditing standards in the US) - but I believe the PCAOB was asked to provide input. Unlike the PCAOB, the PIOB will not have the authority to enforce its own standards. This was the primary problem with the PCAOB's ineffectual predecessor, the AICPA - but the PIOB would not be unable to overcome the practical obstacle of enforcing standards in jurisdictions for which it doesn't have authority.

One of the eight members of the PIOB include Aulana Peters, former SEC Commissioner, former member of the AICPA Public Oversight Board and retired partner of Gibson Dunn.

March 01, 2005

March Eminders Now Available

Here is the March issue of our monthly email newsletter. To receive this newsletter each month by email, input your email address in this form.

Valuation of Personal Usage of Corporate Aircraft and The Jobs Act

In response to questions from many members of, we have added a new practice pointer from Stewart Lapayowker regarding the impact of the Jobs Act on airplane use. Stewart's pointer specifically addresses:

- did the Jobs Act change the method for computing the value of the perquisite to be included in the employee's income? and

- did the Jobs Act change the deductibility of expenses associated with the operation of the corporate aircraft for entertainment purposes and, if so, how does one compute the expense subject to the disallowance?

We have also added additional resources on airplane use to the "Airplane Use" Practice Area.

House Democrats Don't Like Exclusion of Shareholder Access Proposals

In response to Corp Fin allowing the exclusion of three shareholder proposals that parallel proposed Rule 14a-11 - in a February 24th letter to the SEC Chairman - six Democrats, including Rep. Barney Frank (D-Mass.) and Rep. John Dingell (D-Mich.) questioned whether the SEC was backing away from its proposed shareholder access framework. According to the WSJ, the letter says: "We are writing to express our disappointment about the recent decision made by the staff. We are concerned that this decision may indicate the commission's lack of commitment to passing a proposal that would empower shareholders by giving them the limited ability to nominate directors."

Better Than Splitting the Baby?

On Sunday, the Washington Post reported, "SEC Chairman Donaldson handed down his decision in the most contentious issue dividing members of the Securities and Exchange Commission. No, it's not executive compensation or the accounting treatment of stock options. It is which commissioner, Cynthia A. Glassman or Roel C. Campos, will get the only other office with the Capitol view when the agency moves into its new digs next to Union Station next month. Neither, it turns out. Donaldson decreed the space will serve as a common conference room." Probably a little smarter than my idea to have the Commissioners share the coveted space (and here is Bloomberg's more extensive article on the resolution).

Posted by broc at 07:19 AM
Permalink: March Eminders Now Available