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"50 Nuggets in 50 Minutes"

Wednesday, July 30, 2003

Our semi-annual signature event! A lightning round of practical advice, covering all the hot issues you are grappling with today. No waiting through hours of conference time to glean a handful of useful tips. Our community has told us that they want more practical information - and they need it now more than ever. This easily can be the most useful program you ever attend - as you will walk away with 50 practical tips!

Join our two experienced editors:

  • Alan Dye, Editor, and Partner, Hogan & Hartson
  • Broc Romanek,, and Here are the 50 Nuggets in no particular order:

    1. Codes of Conduct - Directors should be covered too. Although not required by SOX rulemaking - as one of the more important groups within a company - it makes sense that directors should be covered by the company's code of conduct. A few companies have written separate codes that apply solely to their directors. Note that the pending NYSE and Nasdaq proposals would require codes that apply to directors.

    It's easier - and more "egalitarian" perhaps - to just insert a sentence into the employee code of conduct that "directors are covered under this code with regard to their director-related activities." The proviso regarding "director-related duties" is necessary because the code should not cover a director's conduct when the director is engaged in a "day" job that does not relate to the company.

    However, this potential solution might not work as the director's code may need to address conflicts of interest that are unique to directors. Independent directors may be CEOs of other companies that they also owe duties. So closely examine the codes to see whether language that applies to directors needs to be finessed.

    2. Codes of Conduct - Avoid having to file a Form 8-K for a waiver of the code. Directly influenced by events at Enron, the SEC adopted new rules that require companies to file a Form 8-K (or post it on the corporate website, if previously disclosed in the form 10-K that this is the approach the company would follow) whenever the board approves a waiver of the company's code of conduct for senior officers. In addition, the proposed NYSE and Nasdaq new listing standards will also require disclosure of waivers.

    To eliminate the potential for having waivers, codes should be scrubbed to clarify any language that would appear to regularly require waivers - when the matters really involve pre-approval of certain activities. For example, a code of conduct might prohibit a senior officer from moonlighting - yet, the board regularly waives this provision to permit officers to teach a semester at a local university. This prohibition language could be tweaked to require pre-approval for teaching.

    3. Board extranets - Make sure you weigh the pros and cons before using one. One consideration is whether an extranet could be used against the company in litigation - since most electronic information is discoverable today, unless privilege or other exceptions apply.

    For example, if directors are alleged to have breached their fiduciary duties, plaintiffs' attorneys could examine the past activities of the board on the extranet to determine whether directors bothered to download the information provided in an online board book. Plaintiffs challenging the due care exercised by the board (or by a special negotiating or special litigation committee) may seek discovery of all communications among directors via the extranet in order to show that the members did not deliberate fully.

    Potentially making matters worse, when directors engage in communication among themselves via an extranet, they may become too casual in their choice of words or may create documents that could be used against the company in subsequent litigation.

    For the most part, privilege and other legal considerations should not be materially different between the electronic world and the paper world. For example, just as in the paper world, if directors communicate among themselves via the extranet without involving the company's counsel, the communication probably will not be protected by the attorney-client privilege.

    On the other hand, with an extranet, there may be less risk of inadvertently destroying documents; the system can be set to automatically retain documents and dispose of them in accordance with a company's document retention policy.

    4. Committee Evaluations - Conduct committee evaluations before board evaluations. Although many companies conduct both their board and committee evaluations at the same time for convenience, we like the idea of separating them by a few months - with committee evaluations being conducted first. This should help to provide time for directors to focus on each distinct group dynamic and more importantly, the results of committee evaluations can be considered as part of the subsequent board evaluation.

    5. Board Evaluations - Consider splitting "questionnaire" into two components: one oral and one in writing. A number of companies split the format of their board evaluations. They use a written questionnaire for administrative issues, such as whether the length of meetings is appropriate and whether materials are sent out timely.

    The more sensitive and substantive questions are asked in an oral interview ("substantive" questions are those that directly relate to the company's recent performance issues). This can allow for more candid and valuable feedback as some directors might balk if asked to reduce their concerns to writing due to perceived liability concerns.

    6. Board Evaluations - Individual evaluations are more important in light of shareholder access debate. The need for the nominating committee to evaluate incumbent directors has become clearer as the movement for shareholders to have a greater ability to nominate their own candidates grows. For the nominating committee to evaluate incumbent directors, it needs information - and individual evaluations is one logical way to gather this information.

    The latest surveys show that only 25% of public companies conduct individual evaluations. The most popular individual director evaluation method is the use of self-assessment questionnaires. Anyone who handles these evaluations should take care as this process can be quite political!

    7. Board Evaluations - Consider the use of peer reviews to evaluate individual directors. Self-assessment questionnaires solve the risks posed by peer reviews (these risks include disturbed board collegiality). However, self-assessment questionnaires can be unreliable due to the inherent conflict of interest present (and some people judge themselves more harshly than they deserve as well).

    If used, peer reviews should be collected by a third party to preserve anonymity - and then the results should be typed up so that any handwritten comments can't be recognized as belonging to a particular director. Then, the third party should summarize the results - and provide each director with a summary of the peer evaluations.

    8. Executive Sessions - The independent directors should experiment with when to hold executive sessions. Normally, executive sessions are held just before - or after - a regular board meeting. Holding an executive session after a board meeting enables the independent directors to react to matters discussed at the board meeting.

    On the other hand, it may be preferable to hold executive sessions before board meetings as a way to prepare for the board meeting - and not be sidetracked by what transpires at the board meeting. However, these executive sessions might last forever and exhaust directors before they get to the board meeting. To solve this potential problem, we like the idea of having the executive session the afternoon before a board meeting that commences the next morning.

    Boards should experiment and determine what works best for them. For example, Intel's board holds executive sessions in the middle of their board meetings.

    9. Executive Sessions - Minutes should be kept but the level of detail should be just above the bare minimum. Most practitioners believe that minutes should be limited in detail - and may be so limited to just identify that an executive session was held and list the types of matters discussed.

    The rationale for limited minutes is threefold. One is that no employee should be present - including the corporate secretary and assistant corporate secretaries. In addition, the independent directors may not wish for management to know the details of what happened in executive session - for the same reasons why executive sessions are important to begin with. Finally, there is the litigation risk concern that is present for minutes of any meeting.

    The bottom line is that directors cannot bind the board to any course of action during an executive session, thus extensive executive session minutes (such as a board resolution) are rarely necessary. But the minutes should not be overly bare-boned as discussed in detail below in #22.

    10. Corporate Governance Guidelines - Plan to regularly revisit the guidelines and affix a date on the online version. It is recommended that the guidelines should contain a date when they are posted so investors can discern when they were last modified (as it is an indication of how often the board revisits the guidelines, a sign of a board concerned with governance).

    It is also recommended that regular consideration of changes for the guidelines be at least tied to the annual board evaluation (since that is when the directors are consciously reflecting on whether change is necessary).

    11. Committee Chairs - Make sure they have lots of time and pay them for it. Many boards are finding that serving as the chair of a key committee can nearly become a full-time job, particularly audit committees. In addition to their committee duties, they can be in demand from a number of the company's constituencies, including major shareholders, credit agencies and even major customers and suppliers.

    In fact, for the largest companies, it can be nearly impossible to hold the audit committee chair position if you have a full-time job - and acting as audit committee chair at more than two companies seems impossible. As a result, a growing number of companies have decided to pay committee chairs more than other directors.

    12. Negotiation with Shareholders Regarding Shareholder Proposals - Build trust early on. It is important to build trust early in the dialogue. Agreeing on easier items, such as additional disclosure, can serve this purpose. Ensuring that everyone is kept informed of significant developments also helps build trust. It is important to keep channels of communication open with the company's in-house and outside counsel to ensure that there are no surprises.

    13. Negotiation with Shareholders Regarding Shareholder Proposals - Establish expectations upfront. When discussing potential shareholder proposals with shareholders, it is critical to establish expectations upfront. Shareholders should have a preconceived notion of what it would take for them to withdraw - or not file - a proposal, and both sides should establish expectations for the dialogue itself.

    Setting internal expectations is a balancing act. On the one hand, it is useful to have a sense going into a dialogue of what measures short of total implementation of the proposal would be satisfactory. Such an understanding is even more important when co-sponsors are involved. This helps avoid a situation in which one sponsor wants to settle but others do not. To handle this issue, some proponent groups appoint a lead or primary filer, who takes on more responsibility in connection with the dialogue and enjoys significant latitude to make decisions about settlement.

    On the other hand, there is a need for flexibility and an open mind. Setting expectations among participants also requires balancing. Shareholders and companies should agree on the utility of deciding, before beginning discussions:

    1) who will participate in the dialogue,

    2) the scope of the discussion, and

    3) how progress will be measured.

    Sometimes, understanding the scope of the discussion is not as easy as it sounds. The shareholder proposal rule's substantive exclusions may lead a shareholder to draft a proposal in a particular way to ensure that it will pass muster with the SEC, when the shareholder's real concern is something quite different. Also, a shareholder may see an issue, such as board independence, as a way to begin talking about more sensitive matters, such as the competence and stature of directors.

    14. Negotiation with Shareholders Regarding Shareholder Proposals - Be realistic. This concept means different things to shareholders and companies, but the core concept is the same: companies exist to make a profit, and the issues raised by shareholders are not always at the top of the CEO's "to-do" list. Most shareholders realize it is often unrealistic to expect that a shareholder proposal alone will effect a change in corporate behavior, especially when the proposal asks the company to do something that it believes is not in its economic best interest. In such cases, it may be necessary for the shareholder to publicize the issue using the media, involve consumers or organize demonstrations in addition to engaging in a dialogue with the company.

    For their part, although corporate governance and corporate responsibility issues are important, top company officers are busy handling many other pressing matters. Accordingly, it may not be possible to ensure that a CEO can meet with a shareholder. Sometimes proponents simply do not understand why the CEO cannot attend meetings to negotiate over a proposal. It is realistic though, in the eyes of both companies and shareholders, to expect that someone with functional responsibility over the subject matter of the proposal will attend such meetings. These employees normally are quite open to the dialogue process.

    15. Negotiation with Shareholders Regarding Shareholder Proposals - Timing isn't everything, but it's not irrelevant. Many shareholders and companies report reaching agreement without a proposal ever being filed. For shareholders seeking to avoid having to draft a proposal and defend it against a no-action challenge - especially if legal fees would be involved - such a resolution can be ideal. Some shareholders prefer to keep their activism low-key and shun the spotlight whenever possible. Some companies state that they - or their senior company officers - view the filing of a proposal as a sign that they have failed. Others claim that the negotiation process is generally more amicable if a proposal has not been filed with the SEC staff.

    The key to reaching an early agreement is to commence discussions early. Many shareholders send letters or call potential target companies well in advance of the shareholder proposal deadline to inform them of issues of concern and initiate discussions. Sometimes, a company and shareholder have been in dialogue on an issue for several years and can simply pick up where they left off.

    At times, though, due to an impending deadline (in the case of shareholders) or a proposal that arrives with no warning (in the case of companies), a pre-filing dialogue is not possible. Some shareholders believe that some companies do not feel sufficient pressure to engage in a dialogue until a proposal has been filed. Reading between the lines, these may be the companies that are "battle-fatigued" from working in industries or at companies with more than an average number of shareholder issues without sufficient support from within the company.

    In such cases, the parties generally begin discussions while simultaneously evaluating the feasibility of a no-action request. It does not usually make sense to refrain from negotiating simply because a no-action request is pending or contemplated. However, a dialogue can be squelched by ad hominem attacks in a company's no-action letter. Individual shareholders are sometimes put off by the fact that a company has sought no-action relief, but institutional investors usually understand that such a request is part of the process.

    Of course, it is easy to feel pressured because the deadline for mailing proxy materials is close at hand and there is a very real risk that the parties agree to a resolution that one or both parties winds up regretting. This concern underscores the importance of setting expectations in advance.

    16. Negotiation with Shareholders Regarding Shareholder Proposals - Settlement is not always the best outcome. At times, allowing a proposal to go to a vote is the better choice. Shareholders often maintain that when the goal is visibility for an issue, letting a proposal (or a group of proposals on the same topic) be put in the proxy can be more beneficial than any potential settlement.

    However, there's a fine line between rallying support and grandstanding. Some shareholders believe that a reputation for obtaining high votes on occasion can help convince companies to settle in the future. Sometimes companies see the merit in putting certain proposals to a vote, especially when the cost of settling is too high or when the company is proud of its record on the subject of the proposal, and would welcome the opportunity to tout its achievements in the proxy statement and to the media.

    17. Director Education - Assist your directors to select worthwhile programs. As can be expected with the NYSE's proposal - and the focus by ISS - on director education, numerous director education opportunities have arisen. As so many of these opportunities are unproven, the ability to gauge the relative worth of each one is invaluable as most directors are very busy and asking them to spend a day (or two) at a conference is a lot to ask.

    Peggy Foran of Pfizer wisely suggests that directors attend educational events where they might also serve as speakers - and where they can interact with as many institutional investors as possible. Unfortunately, these type of opportunities might not exist for smaller companies.

    18. Board Meetings - Develop a theme for a strategic planning session that includes an educational component. The need for the board to periodically meet over an extended period of time to conduct strategic planning is well known. By developing a theme, the planning can be even more focused. And by bringing in experts to facilitate a portion of the meeting by providing instructional advice, all of the directors might be able to meet their director education "requirements" for the year.

    19. Board Committee Meetings - Although a "check the box" mentality should be avoided, checklists are useful to ensure that all matters contemplated by the committee charter and corporate governance guidelines are addressed. With an ever-growing list of responsibilities, it is useful to have checklists for each committee to ensure that their obligations are being met. These checklists should be regularly updated by the corporate secretary.

    20. Board Committee Meetings - Pay more for committee meetings. As committee meetings grow longer - sometimes longer than regular board meetings - some companies have decided to pay directors the same amount for attending a committee meeting as attending a board meeting.

    To ensure that director compensation doesn't get too high, it might be necessary to have separate meeting fees for regular committee meetings and less formal (e.g. teleconference) "business" committee meetings.

    21. Board Materials - Improve information flow between board committees and entire board. In this era of perceived heightened board liability, it is not uncommon for directors to want to see minutes for each board committee meeting - even though they don't serve on each committee.

    As state law dictates that each director is entitled to rely on the same information to approve an action, it is important that all directors have the opportunity to review any board documents they wish, even if an inside director asks to review sensitive compensation committee materials or minutes. Remember that a key component of Smith v. Van Gorkum was the failure of directors to have materials well enough in advance in order to prepare thoroughly.

    22. Board Minutes - No more "bare-boned" minutes. Although many companies have traditionally followed the school of thought that board minutes should be relatively "bare-boned," we believe that boards should take care to provide sufficient detail in their minutes so that they more clearly reflect what transpired.

    It is not that the minutes need to be so detailed as to reflect what a particular director said - but that they provide some level of detail as to whether discussions took place (as opposed to merely noting that a specific action was approved). This might be important if a government investigation or lawsuit ensues - but also will assist independent auditors and underwriters in their due diligence endeavors.

    Although some practitioners might continue to believe that minimal minutes are sufficient if the practice is followed consistently, I don't agree with this notion. If the judge says that the record on a particular issue isn't sufficiently detailed to support the duty of care or good faith, the defense can't say with a straight face "Oh, don't worry, we always leave a bare bones record behind?" Besides, you probably wouldn't even be able to get the history of bare bones into evidence, even if the litigators wanted to.

    In fact, for major corporate actions, it might even make sense to have a litigation-savvy lawyer draft the minutes because they may be scrutinized at a level that will make the board wish it had approached the documentation process as though it were documenting the actions of a special committee in a merger. Remember that it is clear that boards and board committees have the authority to hire independent counsel - and this may be an appropriate role for such counsel. Recent cases have certainly faulted the corporate record left behind, preventing directors from establishing that they have met a duty of care or good faith (e.g., the reference in Disney to the effect that only one and one half pages of the minutes covered the approval of Mr. Ovitz's contract).

    The bottom line is that the minutes should include a description of each major item that includes a summary of the topic, the major issues presented, the major factors taken into account - or relied upon - by the board, the board's decision and, in appropriate cases, the alternatives considered (e.g., particularly for some of the audit committee decisions that mandate this). Also, in connection with matters discussed by the auditors with the audit committee, the minute taker should ensure the minutes line up with the records on those topics that the auditors now have to retain for seven years.

    23. Board Committee Minutes - Have them signed by multiple parties if necessary. Particularly with more boards holding concurrent committee meetings to save time, it is increasingly impossible for corporate secretaries to attend all meetings. Many committees use an employee from the related functional department to serve as assistant secretary to take minutes ( controller employee for audit committee; human resources employee for compensation committee).

    Those persons should be trained in the "art" of taking minutes and should execute the minutes. Quite a few boards also require the committee chairs to sign the committee minutes. This serves to ensure that the committee chair has carefully read them.

    24. "Independence" Determination - Use open-ended question in D&O questionnaire to capture "soft" relationships. This type of information should be collected for the board's benefit when it makes its independence determination; it's not collected for purposes of public disclosure. The questionnaire should explain this difference and note which questions are not being asked for disclosure purposes. This serves to allay any fears that the answers will be disclosed to those potentially sensitive questions.

    However, in some cases, public disclosure beyond what is required might be recommended so that it doesn't look like the board has something to hide (and avoid media embarrassment). The challenge here is that some directors inevitably will be sensitive about providing this type of information even in the D&O questionnaire.

    25. "Independence" Determination - Talk to each director's assistant and share your D&O questionnaires with the corporate secretaries at any companies associated with your directors. As it is fairly common for a director to delegate filling out a D&O questionnaire to his or her assistant, it is important that you walk the assistant through the questionnaire to help ensure that the appropriate information is obtained. Developing this relationship is critical for this and other purposes.

    In addition - so long as permission has been procured of the implicated director - provide a copy of your D&O questionnaire to the corporate secretary at that company so they are not blindsided by a question from their CEO (who sits on your board) as to why their questionnaire varies so greatly from your questionnaire. The relationship with that corporate secretary can be critical as well.

    However, realize that some companies do not want to have anything to do with an officer's board service - typically for liability reasons, as the company's indemnification protection likely doesn't extend that far.

    26. "Independence" Determination - Be careful who your sister marries. As the definition of "independence" broadens, it becomes necessary to probe deeper - and more regularly - into the personal lives of your directors. If you are a director on an audit committee and your brother-in-law takes a job at KPMG, you might have trouble maintaining your director seat.

    It might make sense to open each board meeting by asking all directors whether they have entered into any new business/charitable relationships or have new personal relationships that could change their independence status. It's the type of matter that needs to be constantly brought to their attention - like Section 16 reporting - to ensure they are sensitive to it.

    27. Audit Committees - Be sensitive to when the audit committee should seek their own outside advice. If you represent the company and recognize a situation where the audit committee might be in an adversarial position vis-a-vis management, you should seriously consider advising the audit committee to hire its own independent advisors, including its own counsel. Otherwise, you might be in a conflicted situation yourself and could have trouble rendering advice to the audit committee.

    Make sure the audit committee charter contemplates the ability to hire its own advisors before this type of situation arises - and that the audit committee has interviewed and has such advisors "waiting in the wings" in case such a scenario arises. Because the need for advisors arises often in a crisis situation when time is of the essence.

    Some general counsels have told their boards that a good rule of thumb is to hire independent counsel anytime there is a management integrity or conflict issue. By providing this type of guidance, the board can avoid hiring counsel in situations where it really doesn't need to hire them.

    28. Audit Committees - For larger companies, reduce the burden on the audit committee by forming a finance committee. This finance committee can consist of some directors who are not considered "independent" and handle tasks that are financial in nature, yet are not required to be addressed by a committee comprised solely of independent directors.

    These types of tasks might include budget review, compliance and even serve as the qualified legal compliance committee (so long as one member of the audit committee and two other independent directors are on the committee).

    29. Corporate Governance Ratings - Don't leave any of your score "on the table." Some companies engage in certain corporate governance practices that can boost their "score" at the various rating services - but don't get credit for them because either they are unknown to the services or for other reasons.

    For example, ISS takes into consideration only information that is made publicly available for its CGQ service. Thus, a company might meet some of the criteria and tell ISS staffers so - but ISS won't take it into account unless it is posted on a web site, in a SEC filing or somehow otherwise put into the public domain.

    30. Reporting Up - Draft a policy that is not overly detailed. There is no need for an elaborate "reporting up" policy. Similarly, if its too rigid, it might depart from what the SEC's rule requires - and is more likely to be violated in practice. In addition, you don't want to create obligations that the rule doesn't impose. It is important to have a policy in writing for compliance and educational purposes.

    31. Reporting Up - Draft the policy so that it encourages communication to the top - The policy should be drafted so that its nature is that of a set of "guidelines" or "suggested procedures." This is because each lawyer bears the burden of his or her own obligation, regardless of what is in the policy. The policy should foster an approach that the reporting lawyer, supervisor and general counsel will work together. The general counsel likely will need help to make sure the response is adequate - and the "response" might actually be a series of "responses" as the general counsel learns more facts and has the benefit of more time to conduct analysis.

    32. Reporting Up - Informally identify who is a "supervisory" attorney and limit the number of supervisory attorneys - Before an issue arises, it is a good idea to identify who is a "supervisory" attorney so that each lawyer clearly knows his or her particular obligations. For purposes of Rule 205, "supervisory" attorneys don't necessarily have to include all lawyers that actually supervise other lawyers in practice. In fact, it is probably desirable to limit this group so that only a handful of lawyers have responsibility for determining what is an "appropriate" response (for a sizable legal department or law firm, we hear that the typical size of that group is about half a dozen).

    33. Reporting Up - Consider requiring each lawyer to certify annually that they are in compliance. It drives home the level of importance of the legal department's or law firm's policy and helps to show that the company or firm has a sound compliance system. Of course, the key is to ensure that these certifications are collected each year. No small task, especially in a large legal department - and may become more of an administrative burden than the benefits it delivers, particularly if some lawyers refuse to sign their certifications.

    Other issues to ponder - if only "securities" lawyers are subject to the reporting up rules, do you have different certifications? And if a company doesn't have the code of ethics signed by all employees annually, why should this policy have any special certification attached to it?

    34. Internal Controls - Coordinate them with your disclosure controls and procedures. As you overhaul your internal controls to comply with the upcoming attestation requirements, you should try to coordinate your efforts to implement Section 404 of Sarbanes-Oxley and the related rules with your existing disclosure controls and procedures and the disclosure committee's activities. It is important that the disclosure committee has a clear understanding of the relationship between internal controls and disclosure controls and procedures.

    Keep in mind that good internal controls are vastly more extensive than disclosure controls - and internal controls are unrelated to disclosure controls for the most part.

    35. Internal Controls - Consider using boutique firms to upgrade and document your internal controls. One debate that has raged recently is the extent to which companies can use their independent auditors to help upgrade and document their internal controls. The pros of doing so include the fact that the same auditors will be attesting to the controls later - so they are the ideal one to ensure they are "up to snuff" now. The cons of this approach is that independent auditors are limited in what they can do since they will be the entities that later attest to what is developed at their clients - and the SEC has warned that the auditor clearly must be independent when it provides its attestation.

    Some experts, like former SEC Chief Accountant Lynn Turner, advise the use of boutique firms to assist in the preparation - firms like Ten Eyck and Provident. The argument is that the use of these boutique firms saves money as they can offer more senior talent compared to a Big 4 firm. A drawback to that approach is that the Big 4 firms have sophisticated tools for testing internal controls that the boutiques might not have.

    We have heard of a few companies that actually have hired other Big 4 firms to assist in the preparation. This solution solves that concern - but might prove expensive. However, due to the potential negative consequences for lack of compliance in this area, it is one area that you don't want to "chisel" and not spend the money required to get "up to speed."

    Regardless of what approach your company takes, ensure that your independent auditors don't go too far in "assisting" to help set up your internal controls, as that might taint their ability to attest later.

    36. Subcertifications - Don't be a cop if you can help it. Some companies have tasked counsel to act as "cop" to collect subcertifications. This can be an ugly job. For example, the heads of business units might turn to their own business unit lawyers to render advice as to whether to sign - and these lawyers might not have the appropriate background to render sound advice. Even worse is the tricky task of handling someone who refuses to execute a subcertification.

    37. Subcertifications - Reconsider your "subcertification" culture. Don't forget that your disclosure controls and procedures should be an evolving dynamic and that it might make sense to reduce the number of employees that execute subcertifications if you find that some of them don't add value to the process.

    We have heard a number of companies that have cut down on the number of employees that sign subcertifications. One approach we like is that only the head of business units are required to sign - and that the disclosure committee has the discretion to ask others to sign. The disclosure committee might elect to exercise this discretion based on information they gather during the diligence process.

    38. Subcertifications - Reconsider whether you should sign one if you are not indemnified. If you are one of the "chosen" asked to execute a subcertification, research whether you are an indemnified party under the company's corporate governance documents. If not, be scared - and push for a change in the subcertification culture to reduce the number of employees that are required to sign them. On the other hand, some believe that signing a subcertification should not require indemnification, since it is delivered only internally. The argument is that all the subcertification really says is that an employee has done his or her job with respect to the public filing,

    39. Disclosure Committee - Reconsider who is on the disclosure committee. Another evolving component of your disclosure controls and procedures is who sits on your disclosure committee.

    As "accelerated filing" for 10-Ks and 10-Qs approaches - as well as more 8-K filings - you want to make sure the disclosure committee is not too large and is comprised of employees that can meet on short notice and on a regular basis.

    40. Disclosure Diligence - Educate anyone that might contribute to the disclosure process. Education can be a tough task but is important to illustrate that the disclosure committee is performing its job adequately. Education is an ongoing task and should be performed each quarter in some cases.

    One practice we like is to send out a copy of SAB 99 - or an executive summary - each quarter to anyone that is asked to contribute to the disclosure process. This should assist to explain the sensitive nature of the elusive "material" standard.

    41. Drafting Sessions - Use for each Form 10-Q if practical. A growing practice is to hold drafting sessions, even for each Form 10-Q. Obviously, this works more easily for companies whose operations are not spread over the globe. Still, videoconferences and teleconferences might fit the bill for multi-national companies.

    The key reason for drafting sessions is to allow the disclosure committee to control the "master" of the document rather than delegate that responsibility to one single person. This should produce a better disclosure document and avoids placing too much responsibility on one member of the disclosure committee.

    42. Quarterly Review by Independent Auditors - Ask for it in writing. Some companies have asked their independent auditors to render their quarterly review in writing to document the process. This can help if the company plans an offering and needs diligence documentation for underwriter's counsel.

    Some companies have even gotten a quarterly letter from their outside counsel to the effect that "to the best of their knowledge, this disclosure document meets the SEC's rules and regulations."

    Because of the amount of work that must be done, it is possible that companies will not be willing to pay to get a letter. Hopefully, the company's advisors might include it as part of the services they already provide.

    43. Earning Releases - Consider issuing them at the same time as filing the Form 10-Q. As accelerated filing becomes a reality, we expect more companies to forego staggered releases of these two documents. Combining them will save management a lot of time as well as the audit committee. Some companies have already implemented this practice, such as Gillette, even though it means their earning releases are issued a few weeks after their peers.

    One added benefit: If your Form 10-Q precedes your press release, you are not required to file the press release on a Form 8-K. While this is not of much benefit to companies that hold conference calls - because a Form 8-K needs to precede the call - it will eliminate the need to file a Form 8-K for many companies.

    44. Regulation G - For filed documents, be prepared to defend "non-recurring" items. The SEC staff's FAQs state that companies must satisfy "the burden" of demonstrating the usefulness of any non-GAAP financial measure that excludes recurring items. The staff has not enunciated standards by which companies will be evaluated in satisfying this standard - but instead states that the acceptability of eliminating a recurring item or items from the most directly comparable GAAP financial measure depends on all of the facts and circumstances. This is not a new practice for the staff as it has historically reviewed disclosures that appeared in filed documents and commented on the acceptability of certain presentations.

    However, the FAQs probably reflect the fact that Item 10(e) may push the staff more into what may be described as merit regulation with respect to disclosures of non-GAAP financial measures, where the staff is the arbiter of whether a company has sufficiently justified its desire to present a non-GAAP financial measure. This in turn may result in a greater divergence between disclosures that appear inside and outside of SEC-filed documents, as companies struggle to present information that they may view as useful or responsive to their investors, and yet which may not meet the staff's standards of acceptability.

    The bottom line is that companies should carefully review their reasons for - and goals in - disclosing non-GAAP financial measures that have the effect of eliminating the effect of recurring items so that they can be clearly articulated and defended.

    45. Regulation G - Use clear descriptions for cash flow measures. The staff's FAQs state that cash flow measures must include a clear description of its calculation and the requisite reconciliation - as well as any material limitations on its use as a liquidity measure.

    One recommendation is that when a company presents free cash flow in a manner that reflects adjustments to operating income or other items that are not commonly expected to be reflected in that financial presentation, the non-GAAP financial measure should be labeled with a term such as "adjusted free cash flow" or "modified free cash flow" and the variance be clearly highlighted. This same recommendation applies equally to disclosures of a variation to any other "common" non-GAAP financial measure.

    46. Regulation FD - Don't forget to consider it deciding what to do with press releases. The Regulation G adopting release really contains two different things: rules governing the use of non-GAAP information and an amendment, effectively, to Regulation FD by adding Item 12 to Form 8-K. When you draft a press release, ask yourself this simple question: Does the press release contain material, non-public information about a completed period? Many companies now are filing press releases left and right that they never previously would have viewed as raising Regulation FD issues - so its important to ask this question. If the press release does not raise Regulation FD issues, and you do not need it on file in connection with a subsequent conference call, it does not raise Item 12 issues. Hint: If you do not hold conference calls, file your Form 10-Q before you issue your press release.

    47. Whistleblowing Policies - Adopt general procedures that are not overly detailed. The procedures should be general in nature and easy to understand and follow. They do not need to be lengthy, but they should, at a minimum, address:

    • how to submit complaints, including how employees can submit anonymous complaints or concerns;

    • the scope of matters covered by the procedures and guidelines as to the content and detail of complaints;

    • how the company retains complaints;

    • who will handle complaints and the process for evaluating, investigating and resolving them; and

    • the role of the audit committee in reviewing and/or investigating complaints.

    Detailed whistleblower procedures might be right for some companies that look to the procedures as a roadmap for both the company and complainants in addressing and resolving complaints. The risks of such procedures, however, are that employees might not be able to understand the "fine print," and might find the complexity of the procedures intimidating, thus reducing the likelihood that they will submit complaints.

    As a result, detailed procedures could defeat two key purposes of the SEC's new rule: to facilitate disclosures regarding questionable accounting matters and to alert the audit committee to potential problems before they have serious consequences. It is also worth noting that the greater the level of detail, the greater the likelihood that the company will fail to comply with its own procedures, which could ultimately be a factor in a subsequent lawsuit, including a securities class action suit.

    48. Whistleblowing Policies - Ensure your process can be quickly completed if necessary. In some cases, it might be important to resolve a whistleblower complaint quickly. Although this expedited treatment should not shirk any of the company's responsibilities, the lack of a quick resolution could harm the company greatly.

    We already have heard of cases where an audit committee or independent auditor wouldn't bless an earnings release until a complaint was resolved. A harsh result indeed.

    49. Whistleblowing Policies - Don't forget to track employees that walk into office to complain. With so much attention being paid to "hotlines," it is easy to forget to address the relatively common situation where an employee actually voices a concern face-to-face. The whistleblowing policy should address these situations and the company should train employees to recognize when they arise - so that they don't inadvertently violate the policy.

    50. Independent auditors - Don't allow your auditors to limit its exposure with an indemnity clause in its engagement letters. We hear that some independent auditors are trying to limit their liability by including indemnity provisions in their engagement letters, for both audit and non-audit services. These provisions limit the auditors' exposure to the amount of their fees. Push back. Also push back on overly broad management representation letters. There is essentially no basis in the accounting literature for many of the imposing additions that have crept into many of these letters during the past year.