Monthly Archives: September 2003

September 15, 2003

We have fielded a lot

We have fielded a lot of questions on the July-August 2003 edition of The Corporate Counsel, in which there is a statement on page 2 that, in order to avoid having to file a second Form 8-K with respect to any non-public material information that is released in an analyst conference call, a company is required “to release their earnings and furnish the first Form 8-K [with the earnings release] by the end of the EDGAR filing day on the day preceding the analyst call, not the next morning before the market (or EDGAR) opens.” As many readers have noted, this prior-day filing does not seem to be required by the SEC rule release or the FAQs issued by the SEC on June 13. This indeed is true and I intend to post a clarification/correction very soon (and thankfully, I was not the author of that statement).

For subscribers, we have posted an interview with Andrea Robinson of Hale & Dorr about Parallel Criminal and SEC Prosecution Risks, a topic that is increasingly becoming important.

Gearing up for the proxy season, we have also posted a list of links to the proxy statements for the 20 most widely held companies. I know its early but our goal is to be a step ahead of the start of the season in an effort to be useful.

September 12, 2003

At a Wednesday meeting, the

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

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

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

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

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

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

September 11, 2003

Last week, at an ALI-ABA

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

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

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

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

For subscribers, Wachtell Lipton has updated its model pre-approval of non-audit services policy which we have added to our samples.

September 10, 2003

Okay, the SEC’s Reg FD

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

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

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

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

Thanks to Warren de Wied of Fried Frank for his excellent (and lengthy) analysis of the Breeden report, which is now available on

September 9, 2003

Last Friday, Microsoft filed its

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

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

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

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

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

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

September 8, 2003

As I blogged a few

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

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

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

September 4, 2003

A recent study by ISS

A recent study by ISS – using the ISS definition of independence – shows that the media industry has the least degree of independence in the make-up of its boards while utilities ranked best.

Media companies ranked last in comparing wholly independent audit and compensation committees, and second-to-last for nominating committees. The industry also ranked last when ranking where entire boards comprised at least 75 percent, or 50 percent, independent directors. Still, the media could claim the lowest percentage of staggered boards within an industry.

Utilities topped the lists for wholly independent compensation and nominating committees, as well as the 75-percent and 50-percent benchmarks for total board comparisons. But two-thirds of utilities’ boards are staggered and the industry had the lowest percentage of companies with separate CEOs and chairs.

We already have a winner of most provacative comment letter to the SEC regarding shareholder access. Way to get your personal beefs in the public domain, Mr. Smith! And nice email address…

September 4, 2003

Grant Thornton has made a

Grant Thornton has made a big deal announcing that it would not perform certain services involving internal control documentation and evaluation for its audit clients. This falls within the debate noted in “Nugget No. 35” from our “50 Nuggets in 50 Minutes” webcast about the extent to which companies can use their independent auditors to help upgrade and document their internal controls.

As noted in that webcast, 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.

Grant Thornton probably has made such a public announcement of its decision in a bid to attract companies that use one of the Big 4 as their auditors to hire Grant Thornton to perform their pre-attestation work. So far, many companies have hired their own audit firm to perform this service (which may be risky) – but some companies have hired other auditors to do so, including another Big 4 firm.

On September 11th, the SEC is taking its first foray into rulemaking in the Section 402 area to exempt qualified foreign banks from the insider lending prohibition along the same lines as domestic qualfied banks are exempt. Unfortunately, no further 402 rulemakings/interpretations are on the SEC’s horizon.

At the same time, the Commission will also consider whether to propose an amendment to Form F-6 that would add an eligibility requirement making the form unavailable to register American depositary receipts if the foreign issuer has separately listed the deposited securities on a registered national securities exchange.

For subscribers, thanks to Tom White and Connie Neigel of Wilmer Cutler & Pickering for adding model reporting-up policies – one for companies and one for law firms – as well as a model QLCC charter to our “Attorney Responsibility Portal.”

September 3, 2003

The September issue of Eminders

The September issue of Eminders is up – and so is a great interview with David Hardison of Fried Frank giving the “low down” on the SEC’s Auditor Independence FAQs. Below is one of questions that David handled:

Broc: You mentioned that some of the FAQs address the provision of non-audit services by accounting firms to their audit clients. Did the Staff use this as an opportunity to impose further restrictions in this area?

David: One could certainly argue that the Staff did. Under the January, 2003 rules, there were five categories of non-audit services, including bookkeeping, valuation services and actuarial services, that auditors are prohibited from providing to an audit client, unless it is reasonable to conclude that the results of the services will not be subject to audit procedures during the audit of the financial statements.

The question then becomes “When is it reasonable to the conclude that the results of a non-audit service will not be subject to audit procedures.” In the FAQs, the Staff rejected the seemingly plausible view that, if the non-audit services were to be provided to a clearly immaterial subsidiary or segment of an audit client’s business, one might reasonably conclude that they would not be the focus of audit attention and that the potential concern that the auditor would be placed in the position of engaging in “self review” would not arise. Instead, the Staff’s position is that the process that an auditor undertakes to decide which portions of a client’s business are immaterial is itself an audit procedure.

As a result, before deciding whether there are ever circumstances in which an accounting firm can provide these types of non-audit services to an audit client, the firm and the client’s audit committee will need to focus on the nature of the services themselves, and not on the size or importance of the entity within the corporation.

As a former head of the NYSE, SEC Chair William Donaldson has taken offense with the pay package of current NYSE head Dick Grasso and has demanded details of what is involved. Chair Donaldson says that the NYSE chair should be paid more like a regulator and not like the CEO of a financial services firm. Not much room for disagreement there…

September 2, 2003

My hunch is that a

My hunch is that a “town hall” website for shareholders to vote on proposals year-round – as recommended in Breeden’s MCI bankruptcy filing – would not be used much by saavy institutional investors. Instead, those investors would continue to rely on the Rule 14a-8 process and submit shareholder proposals in the normal course. This is because those investors often have other agenda items they wish to discuss with management and the proposal is more of a “calling card” to open a dialouge.

In many cases, investors will withdraw their proposals after satisfactory talks with management before the proposals are ever publicized. The ability to use a proposal as leverage to enter into broader negotiations would not exist with the town hall website because once posted, the proponent arguably would no longer be able to control the destiny of the proposal (although we have not seen details about how the town hall site would work, the logic is that once posted, all shareholders would have an interest in it).

Instead, the town hall website likely would be used primarily by retail investors and perhaps by institutional investors at companies that either are generally unresponsive to reasonable shareholder requests or have pressing performance issues.

For subscribers, we have posted a sample “reporting up” policy for law firms in our Attorney Responsibility Portal.