Monthly Archives: November 2003

November 11, 2003

Are You Having Trouble Overseas

I have been hearing that US-based, multinational companies are having difficulties implementing their Codes of Ethics in overseas units. Some companies are getting pushback from employees in some countries just because their cultures do not lend themselves to this new type of oversight (particularly Italy, Spain, Germany).

The more serious issue is that local counsel are telling employees that forcing these types of codes upon them may generally violate local country laws (employee-protection types of laws), union agreements or can be viewed as a change in terms of their employment that cannot be made without consent/consideration.

In particular, these local counsel don’t like the fact that a Board of Directors can make changes to the Codes and those changes apply to them, regardless if employees agree (which is bizarre, because this has always been the way that general employee handbook provisions work). Please email me if you have had similar problems.

For subscribers, we have launched a “Code of Ethics” Portal, which is being managed by in-house lawyer Michael Goldblatt.

Nominating Committee Disclosure Proposal as the “Sleeper”

Under the SEC’s proposal regarding nominating committee activities, if the nominating committee received a nominee recommendation from a shareholder or group of shareholders that has beneficially owned more than 3% of the company’s voting common stock for at least one year as of the date of the recommendation, and the committee decided not to nominate that candidate, the company would be required to disclose the name of the stockholder that recommended the candidate and the specific reasons that the nominating committee decided not to include the candidate as a nominee.

I have long felt that this proposal was a “sleeper” and was receiving not enough attention compared to its more controversial sibling, shareholder access. At the PLI conference, my feelings were bolstered when Sarah Teslik, Executive Director of the Council of Institutional Investors, stated that she believes this disclosure proposal will be more effective in changing nominating committee behavior than the shareholder access proposal.

For subscribers, I have stuck my neck out and put together a list of eleven actions that companies should contemplate now in the face of the SEC’s two proposals that implicate the nominating committee.

November 10, 2003

NYSE Companies to Receive Clarifying

Later this week, the NYSE will be sending out emails to listed companies to help them understand what to disclose in their 2004 proxy statements regarding their obligations under the new governance listing standards. [Note that my early morning blog regarding relief for 10/31 FYE companies was not accurate.]

I also hear that the NYSE intends to roll out a web page on corporate governance by next fall.

Notes from PLI’s “SEC Hot Buttons” Panel

For subscribers, we have posted notes on the “SEC Hot Buttons” panel that featured Shelley Parratt, Deputy Director for Disclosure, Division of Corporation Finance and Norman Slonaker, Partner of Sidley Austin Brown & Wood.

We will be dribbling out more notes over the week as we clean them up.

’33 Act Reform – Is the End of Paper Nigh?

During one interesting segment of the PLI Conference, Bill Williams of Sullivan & Cromwell went over a potential framework of how it might look. Corp Fin Director Alan Beller noted that the SEC staff was working on a proposed framework and it was his belief (not speaking for the Commission) that it would be out “not too far in ’04.”

Regarding the ongoing “access vs. delivery” debate, Alan stated his belief (again, just his own beliefs) that the policy decision regarding whether investors had sufficient Internet access had already been made – so that delivery didn’t seem to make sense except for preliminary prospectuses in the IPO context.

By the way, the SEC staff is taking great pains to not use the ill-fated “aircraft carrier” terminology when referring to this ’33 Act reform project.

Governance Woes Continue on All Sides

In my humble opinion, one of primary problems with the SEC’s shareholder access proposal is that the governance practices of many investors are no better than those of public companies. That is now becoming all too clear in the case of mutual funds (check out today’s editorial by Nell Minow in the USA Today).

The recent disclosure of the $9 million compensation earned by TIAA-CREF’s CEO, Herbert Allison – who interestingly enough was just named to be on the NYSE new board – is another case in point. Here is what the NY Times said on Saturday:

“Some experts questioned the size of the package. Ashton McFadden, managing principal of James Beck Global Partners, a New York executive recruitment firm specializing in the asset management industry, said that a $9 million package put Mr. Allison on the high end of chief executive pay in the asset management industry, even considering the amount of assets TIAA-CREF manages. He also said that a $24 million severance package and a lifetime pension were unusual.”

November 5, 2003

SEC Finally Blesses NYSE/Nasdaq Governance

Late yesterday, the SEC posted an approval order for the NYSE and Nasdaq governance listing standards that have been kicking around for more than a year.

Under the transition rules of these new standards, companies will be expected to begin complying with these new listing standards as of the earlier of their first annual meeting after January 15, 2004 or October 31, 2004, except as otherwise provided in the case of foreign private issuers, small business issuers, and initial public offerings.

Personal anecdote – I will be attending the annual PLI Securities Law Institute in NYC for the remainder of the week, with limited Web access, so you might not see a blog til Monday. We will be posting some notes from the conference then.

More on Financial Expert Determinations

My blog on Monday regarding how boards should determine audit committee members evoked a strong response from the community. Not disagreements – but additional commentary.

Brink Dickerson of Troutman Sanders notes that he has not been happy with the “self assessment” approach saying: “We tried it a couple of times, but in at least two instances it has yielded directors who say they are qualified and who then have to be gently told that they are not. It annoyed the both CEOs who were impacted, but fortunately the outside counsel was not blamed.

It has worked better when we have interviewed the purported financial expert candidates on behalf of the board. In several cases we have tasked an associate to call up the board member, run through the criteria, and generated a brief memo (two to three pages, at most) to the board describing the criteria and his/her conclusions so that the board has a nice summary to rely upon.

Since the associate is not intimately familiar with the members’ background — and we have intentionally picked associates who are not — he/she can apologize at the beginning of the call for being ignorant and then ask a bunch of “dumb” questions. It is a lot harder for the general counsel or someone at the client to do that. All in, it seems to be about two hours of work, and so far has generated happy clients.”

Shareholder Communications with Directors

In the near future, the SEC intends to adopt its proposal that would require companies to disclose various aspects of how its directors communicate with shareholders – the SEC intends to have companies make this disclosure in the upcoming proxy season.

In one of our more informative interviews, learn from Rich Koppes – who has dealt with this topic both as a shareholder (former GC of CalPERS) and as a director – what companies might consider doing and the ramifications of establishing more communication between these two corporate behemoths in Rich Koppes on Directors Meeting with Shareholders.

PCAOB Issues Briefing Paper on Non U.S. Auditors

Last week, the PCAOB issued a briefing paper that describes the broad parameters of its approach to the oversight of non-U.S. accounting firms, a controversial topic that I have blogged about several times. This briefing paper describes the PCAOB’s plans for oversight of non-U.S. registered public accounting firms, based on cooperation with appropriate non-U.S. auditor oversight authorities, including:

– A framework to permit varying degrees of reliance on a firm’s home country system of inspections, based on a sliding scale (i.e. the more independent and robust a home country system, the higher the reliance on that system).

– A modification to the PCAOB’s registration form to permit, where applicable, the inclusion of certain information about a non-U.S. firm’s home country oversight system, in order to facilitate coordination between the PCAOB and non-U.S. oversight systems.

– A 90-day extension of the April 2004 deadline for non-U.S. firm registration to allow sufficient time for the PCAOB to have final rules in place in this area, as well as permit non-U.S. firms a reasonable amount of time to understand and prepare for registration.

November 4, 2003

November Eminders is Up! The

The November issue of our complimentary email newsletter is posted – sign up for it today by just inputting your email address and clicking a button!

ABA Comments on Possible Retroactive Application of Shareholder Access Proposal

Yesterday, members of the ABA’s Federal Regulation of Securities – those that comprise the Task Force on Shareholder Proposals – submitted a comment letter to the SEC objecting to the use of the Rule 14a-8 requirements to the opt-in requirements of proposed rule 14a-11 – as well as objecting to the possibilitity that the proposed triggering event that consists of a 35% withheld vote could be effective before the SEC adopt a final rule.

Essentially, these members of the ABA are saying that the proposed rule should be finalized so that the parameters and implications of an opt-in proposal or withholding of votes is fully understood before shareholders are asked to take action. The 12-page comment letter is in the form of interim comments, with more extensive comments on the proposing release to come later.

This comment letter is not yet on the SEC’s website, but we have the letter posted in our “Shareholder Access Portal.”

FASB Defers SFAS 150 Provisions Relating to Mandatorily Redeemable Noncontrolling Interests – and Requires Restatements in Some Cases

Last week, the FASB decided to defer the application of paragraphs 9 and 10 of SFAS 150 as they apply to mandatorily redeemable noncontrolling interests. Those paragraphs require that mandatorily redeemable minority interests be classified as a liability on a parent company’s financial statements in certain situations, including when a finite-lived entity is consolidated.

This deferral is expected to last so long as they are addressed in either Phase II of the FASB’s Liabilities and Equity project or Phase II of the FASB’s Business Combinations Project. No early adoption for noncontrolling interests is allowed during the deferral period – and any financial statements that have applied these paragraphs must be restated. Ouch!

November 3, 2003

Designating Audit Committee Financial Expert:

One question that I keep getting is what processes should a board use to make its “audit committee financial expert” determination. Faegre & Benson recommends the following process (with the caveat that each company’s circumstances may require a different process):

1. Send Audit Committee Questionnaire to audit committee members and have them returned prior to board meeting. Circulate the completed questionnaires to all directors prior to the board meeting.

2. Have the General Counsel do some analysis of the completed questionnaires against the criteria prior to the board meeting to help the board figure out if there are additional questions left unanswered by the completed questionnaire that would require further inquiry, etc. and present analysis to all directors at the board meeting.

3. At the board meeting, directors could then discuss the completed questionnaires and ask additional questions to get information they need to complete their assessment and use the analysis table to walk through the definition of an “audit committee financial expert.”

Overall, the audit committee should agree which of its members shall be suggested to the board as the “financial expert” – and from a practical perspective, a director should not be identified as a financial expert without their consent. Management nor nominating committees should play much of a role in this process (other than assistance from the General Counsel or outside counsel in asking the right questions and conducting a review of the questionnaires – or recruiting a new director that qualifies as a financial expert).

For members, in our “Audit Committee Portal” – courtesy of Faegre & Benson – we have posted a sample audit committee questionnaire, a board resolution regarding a financial expert determination and a spreadsheet with the financial expert criteria that audit committee members can use to help analyze prospective financial experts. In addition, we have other sample D&O questionnaires available.

Y2K All Over Again?

One readers shares: While surfing to Oracle Corporation’s website for technical information, I was startled to see Sarbanes Oxley prominently featured on Oracle’s homepage. You might call it a new high water mark for the hype that has built around SOX that the same vendor that promised us Network Appliances in the 90’s, and reassured us at the millennium that its technology would ward off the perils of Y2K is now offering us white papers on governance and invites us to “Learn how Oracle’s powerful differentiated capabilities can help you meet the demands of the Sarbanes-Oxley Act.”

Crisis in Mutual Fund Industry

As Pat McGurn of ISS noted in our recent “Wildest Proxy Season” webcast, mutual funds often are the “swing” vote in a close vote. In addition, the SEC’s recent proposal on shareholder access will undoubtably make the votes cast by mutual funds even more important.

That’s one reason why the governance failures at funds are so scary. The reforms that companies have undergone over the past two years pale next to the ones necessary to fix governance in the mutual fund industry. Yesterday, the NY Times ran two good articles on the topic – one about the excessive compensation earned by Putnam’s CEO and one was an interview with John Bogle, the founder and CEO of Vanguard (who offered his own reform ideas – and noted that the all of the fund scandals have yet not been revealed).

Yesterday, Nell Minow emailed me this disturbing quote from the Investment Company Institute’s Report on Mutual Fund Directors (published in 1999 to help investors understand the roles of mutual fund directors):

“[S]hareholders gain an extra layer of protection because each mutual fund has a board of directors looking out for shareholders’ interests. Unlike the directors of other corporations, mutual fund directors are responsible for protecting consumers, in this case, the fund’s investors. This unique “watchdog” role, which does not exist in any other type of company in America, provides investors with the confidence of knowing that directors oversee the advisers who manage and service their investments.”