Monthly Archives: March 2004

March 17, 2004

What the Top Compensation Consultants

Don’t forget tomorrow’s exciting NASPP webcast – “What The Top Compensation Consultants Are NOW Telling Compensation Committees.” Try a no-risk trial membership to the NASPP and hear the top consultants “tell it like it is.”

Besides NASPP Chair Jesse Brill, who will moderate, the panelists are:

Peter T. Chingos, National Director Executive Compensation for Mercer. Peter has been a leading light in the field of executive compensation for over 25 years and consults with numerous boards, CEOs and managements. Peter is also a member of the NASPP’s Advisory Board.

George B. Paulin, President and CEO of Frederic W. Cook and Co., Inc George is one of only three people in the past 15 years to receive our Best Compensation Idea Award. His just published piece Best Compensation Ideas Features and Practices should be on everyone’s “must” reading list.

Tim Sparks, President, Compensia, a newly formed consulting firm specializing in providing counsel to boards, compensation committees and senior management. Many of us know Tim as a nationally recognized compensation lawyer and former senior partner and member of the Executive Committee at Wilson Sonsini Goodrich & Rosati. Tim has written and spoken extensively on executive compensation issues and serves on the NASPP Advisory Board.

Real-Time Disclosure Adopting Release Posted

The SEC has posted the adopting release with the new Form 8-K amendments – this is a PDF 133-page document double spaced. I am cooking up a May webcast on the topic…

Electronic Application for Form IDs

In a welcome development, the SEC has proposed amendments mandating the electronic filing of applications on Form ID for access codes to file on EDGAR. The SEC is taking comments until April 5th – and expects to launch the new system in late April, possibly after little further notice.

By that time, a related new online filing system accessed through an EDGAR Filer Management website is scheduled to be completed.

[My final four: Duke (champion), Gonzaga, UConn and Wake Forest. Go Terps!]

March 16, 2004

The Mad 10-K Rush is

As many of us know, yesterday was the deadline for calendar-year, accelerated filer companies to file their 10-Ks. This year’s deadline is 75 days after the company’s fiscal year end. So far it doesn’t look like the tightened deadline has been problematic for most companies as only about 50 companies have filed a Form 12b-25 (although the deadline for filing those is not until the end of today) and quite a few companies filed their 10-Ks well before yesterday’s drop-dead date.

Those of us that have been around for more than a decade might fondly recall the days before EDGAR when lines of Federal Express trucks stretched a few blocks in front of the SEC’s HQ – as many companies waited until the last day to ship their 10-Ks to the SEC’s Filing Desk. Dem were da days…

Impact of Forensic Accounting on Fraud Investigations

We have posted Part II of my interview with Howard Silverstone and Mike Sheetz on the Impact of Forensic Accounting on Fraud Investigations.

Updated International Corp Fin Guidance

For the first time in several years, the SEC staff has updated its “International Reporting and Disclosure Issues In the Division of Corporation Finance” on the SEC website. We will be updating our “SEC Staff Guidance” Portal accordingly.

March 15, 2004

MD&A Panel at PLI’s “SEC

Thanks to Kimberley Drexler, we have posted our notes from the MD&A workshop panel at SEC Speaks.

SAB 105 and Treatment of Derivatives

Last week, the SEC issued Staff Accounting Bulletin No. 105 – SAB 105 – which summarizes the views of the staff regarding the application of generally accepted accounting principles to loan commitments accounted for as derivative instruments.

Regarding when to implement SAB 105, the SAB states that the staff will not object if companies that have not already been applying SAB 105 accounting continue to account for loan commitments as derivatives as they have in the past for those commitments entered into on – or before – March 31, 2004. However, for any loan commitments entered into subsequent to that date, the staff expects all companies to apply SAB 105 to them.

SEC Proposes International Accounting Standards for Foreign Private Issuers

On Thursday, the SEC proposed amendments to Form 20-F that would allow foreign private issuers to change their basis of accounting to international accounting standards. These standards are known as International Financial Reporting Standards or “IFRS”. The SEC already has posted the proposing release.

With its proposal, the SEC seeks to ease the burdens that foreign private issuers may face when they adopt IFRS for the first time, while still improving the quality of financial disclosure they provide to investors. It is noteworthy that companies located in the European Union are required to adopt IFRS in 2005.

Today, Form 20-F requires foreign private issuers to include 3 years of audited financial statements. The proposal would allow these companies- for their first year of reporting under IFRS – to include only 2 years of audited financial statements in their SEC filings and require any company that adopts IFRS for the first time to provide disclosure related to exceptions from IFRS on which it relied, including a reconciliation from its prior methods of accounting. The new regulations would apply to companies that publish IFRS financial statements for the first time for any fiscal year beginning no later than January 1, 2007. There is a 30-day comment period.

March 12, 2004

“Conduct of the Annual Meeting”

We have posted a transcript from last week’s popular webcast regarding Conduct of the Annual Meeting.

Real-Time Disclosure is Here!

Yesterday, the SEC adopted new 8-K requirements that represent a fundamental change in the disclosure framework, moving toward the real-time reporting framework that Harvey Pitt first envisioned way back before Enron and SOX. There are quite a few changes in the final rules compared to the proposal, including 4 – rather than 2 – day filing deadlines (with no provision for an extension of the deadline).

There are 8 new items in 8-K, 2 existing items are expanded and 2 items are transferred from the periodic reports. There is a safe harbor from Rule 10b-5 for 7 of the new items – and the safe harbor extends only until the due date of the next periodic report for the relevant period in which the 8-K event occurred. Non-binding merger letters of intent are not required to be disclosed.

As the press release from the SEC bears out, this really could be a dramatic change in philosophy – one Commissioner said that bad information is worse than delayed information. However, early analysis of the new rules indicates that companies may still decide to hold off on making disclosure until they are ready to make complete disclosure – so they might miss the 4 day deadline by a few days and take a risk (rather than giving incomplete information to the market and taking a bigger risk).

For all companies, the effective date of the new rules is August 23, 2004 – so it takes effect after the 2nd quarter 10-Q deadline for calendar year companies. Five law firms already have put out memos on this SEC action – see B.26 of our “Sarbanes-Oxley Law Firm Memos.”

Securities Settlements and Myth of Opting-In

2003 was a historic year for securities settlements – and there is a trend for some institutional investors to “opt out” of class actions lawsuits. This effectively means that companies are faced with simultaneous class actions. Learn more from fellow blogger, Bruce Carton on 2003 Securities Settlements and Opting Out of Class Actions.

March 11, 2004

More “SEC Speaks” Notes We

We have posted our own notes from PLI’s “SEC Speaks” from the Corp Fin panels.

The SEC’s Roundtable on Shareholder Access

Yesterday’s roundtable at the SEC was filled with star-studded panelists and was quite a program. The SEC did a great job of bringing in the best and brightest from all corners of the debate and it really brought those 13,000 comment letters to life. (About 150 attended live – I was surprised there were empty seats.)

To me, the most persuasive arguments were presented by Ira Millstein and Joe Grundfest on why the SEC should hold off on its proposed framework – and instead use a simpler model based on holding “true” elections of directors. They argue that the current plurality system is fundamentally flawed and that the SEC’s proposal doesn’t fix that problem (David Ruder called the proposal a Rube Goldberg solution and Carter Beese said it was prone to the law of unintended consequences).

Based on the way that Commissioner Harvey Goldschmid debated some of the corporate advocates, I doubt he is going to change his mind. Commissioner Campos read a statement early on and otherwise was silent. Chairman Donaldson asked a few questions but did not reveal if his leanings were changing at all. So I would hazard to guess that the Commission will bless its proposal sometime in a month or so, perhaps with some changes at the edges (although you never know and I could be wrong).

If the SEC does adopt its proposal, the head of the US Chamber of Commerce threatened to sue. A panel packed with academics provided a variety of arguments supporting the SEC’s authority to adopt its proposal. So the ultimate showdown might be a few years away in a court somewhere.

The Evelyn Y. Davis Show

In mid-afternoon, Evelyn Davis’ panel took the stage and Evelyn kicked it off with a 15-minute monologue. If I was Mark Burnett – the “vision” behind all those reality TV shows – I would grab Evelyn for her own show as soon as possible.

Evelyn was quick to mention how she had spoken to the CEO of Bank of America last week and advised him not to pay the SEC’s fine in the mutual fund scandal (and reported that the CEO was thinking about it!). She claimed that she had also spoken to SEC Enforcement Director Cutler a few days ago regarding the same. Not sure how this is relevant to the shareholder access proposal, but it made for a solid entertainment break from the weighty issues of the day. She is one of a kind. (By the way, Evelyn opposes the SEC’s proposal – because it discriminates against retail investors.)

March 10, 2004

The PCAOB’s Open Meeting Regarding

As a frequent attendee of open SEC Commission meetings over the years, I was curious how the PCAOB’s first open meeting to deal with a substantive rulemaking would be run yesterday. Overall, the meeting was very well run and I was pleased to be handed copies of the releases that were approved during the meeting on the way out (and the releases were soon posted on the PCAOB website thereafter – in comparison, it takes the SEC a few days).

Another distinction was the meeting location – it was held at a hotel since the PCAOB HQ can’t accommodate large crowds (about 200 attended live – it was also webcast). Otherwise, the meeting was run much like a SEC meeting (e.g. plenty of lovin’ for the staffers who wrote the rules), with minor differences such as each Board Member reading a statement regarding the internal control adopting release – and only one Board Member, Dan Goelzer, who is a former SEC GC, asking questions.

Note that the SEC Chief Accountant is quoted in today’s paper as saying it would take the SEC around 6-7 weeks to vote on the PCAOB’s final rule.

Copyright Squabble Continues Between PCAOB and AICPA

During the part of the open meeting when the PCAOB proposed changes to its interim standards (which was necessary to accommodate the internal controls rulemaking), Board Member Kayla Gillan noted that the proposing release would only have excerpts from the applicable standards – and thus a lack of transparency – due to an ongoing dispute with the AICPA regarding copyright protection of the standards that the AICPA issued in the past. Dan Goelzer weighed in on this topic as well.

As I blogged about last year, I agree that the AICPA really has to get off the dime here and allow its standards to be transparent. This issue is emblematic of all that was wrong with the AICPA when it was the nominal watchdog of the profession.

SEC Proposes National Market System Changes

Here is a link to a Federal Register copy of the proposing release on proposed Regulation NMS applicable to the National Market System. This is a more manageable 91 page document – compared to the 346 page document on the SEC website. One proposal in particular would establish a uniform trade-through rule for all market centers, with certain exceptions. Comments are due by May 24.

March 9, 2004

PCAOB Already Posts Final Internal

I went to the PCAOB open meeting this morn – remarkably, the PCAOB already has posted its final internal controls release (with still is subject to SEC approval). For the most part, the final release incorporates changes recommended by the corporate community, with some notable exceptions.

One of these exceptions is that the final release retains the standard that requires the independent auditor to evaluate the audit committee’s performance as part of its internal control evaluation (however, the release makes clear that the full board of directors still is primarily responsible for conducting such an evaluation – and added a new element where the auditor must report to the full board if it believes the audit committee ineffectively oversees the company’s external financial reporting and internal controls). More about the PCAOB’s meeting tomorrow.

PLI’s “2004 SEC Speaks”

Thanks to Bryan Cave, we have posted some brief notes from remarks that Alan Beller and other senior SEC staffers made on Friday at PLI’s “2004 SEC Speaks.” We will be posting our own more extensive notes from the conference shortly.

Even More on Disney

A few more items of interest on last week’s historic meeting. Roy Disney and Stanley Gold did indeed engage in some solicitation efforts other than the media and the Web. They retained McKenzie Partners to assist in a solicitation campaign that included mailing letters to all Disney stockholders. They also hired a PR firm.

These solicitation efforts appear to have fallen within the scope of Rule 14a-2(b)(1), the proxy rule that provides an exemption from the filing and disclosure requirements of Rules 14a-3 through 14a-6. As for discretionary authority, this “no-vote” campaign didn’t push the election into a non-routine category – so the NYSE allowed discretionary broker voting on the election of Disney directors.

How Many Directors Get a 35% Withhold Vote?

Yes, I’m gearing up for tomorrow’s shareholder access roundtable hosted by the SEC – here is the final agenda and related materials posted by the SEC yesterday. I had to look twice – Evelyn Davis is on a panel! It should be quite a show!

According to a statement from Rich Daly, head of ADP’s brokerage group, during last year 99 panelists have submitted statements for the roundtable), there were 69 shareholder meetings of the Russell 2000 companies that resulted in at least one director getting a 35% withhold vote (and actually there were 137 directors that triggered that threshold at those 69 meetings). There is other interesting information in Rich’s statement regarding the changes to ADP’s system that would be required if the SEC adopting its proposed framework.

Thanks to Dave Felman of Hill, Ward & Henderson, we have posted these selected interesting excerpts from comments submitted on the SEC’s proposal in our “Shareholder Access Portal.”

March 8, 2004

A New Winner! In the

In the “Shortest 8-K Contest,” Adam Savett of Cohen, Milstein, Hausfeld & Toll informs me that a recent 8-K filed by Charter Communications is only 22 words. I am confident that someone out there can even beat that…keep ’em coming.

Future of the Accounting Profession made me aware of this November report on the future of the accounting profession. This report was the result of a meeting between leaders from the worlds of accounting, finance, law, academia, investment banking, and journalism. Among other topics, the report covers:

– The Value of the Audit
– Regulation and Oversight in Flux
– What Went Wrong?
– Structural Challenges Facing the Accounting Profession
– What Should Financial Reporting Look Like in the Future?
– Improving Auditing and Financial Reporting Standards
– Licensing Issues: More Firms, More Depth

Nell Minow on Disney

After Disney’s meeting last Wednesday, the Chicago Tribune ran this op-ed by Nell Minow:

“When you wish upon a star, it may make no difference who you are, but these days when you are trying to get the support of your shareholders, who you are is of increasing importance. The latest chief executive officer to learn that lesson is Walt Disney Co.’s Michael Eisner. A stunning 43 percent of his shareholders refused to vote “yes” on his re-election to the board. This vote of no confidence led Disney directors Wednesday to replace Eisner as chairman, even though they had refused to do so before.

This comes at a time of great skepticism and concern about the independence and ability of corporate boards. Shareholders are painfully aware that distinguished directors like Henry Kissinger and Richard Perle were unable to prevent the CEO of Hollinger International from moving millions of dollars out of the company and into his own bank account because of a booby-trapped governance structure that gave CEO Conrad Black control of the voting shares. The charges against former executives of Enron Corp., WorldCom Inc., Adelphia Communications Corp., and Tyco International have highlighted the failure of the boards to provide effective oversight.

J.P. Morgan Chase & Co. and Bank One Corp. look very compatible in their pending merger as far as lines of business go, but they are far apart in corporate governance. Our firm gave Bank One’s board the highest grade in its industry, while J.P. Morgan’s was second to last. Shareholders may balk–or sell–unless the combined firm makes a commitment to best-in-class in terms of corporate governance.

The new chairman of Smith & Wesson’s parent company recently resigned because of press reports of his jail term for armed robbery in the 1960s. Even though his record since then has been impeccable, the increased scrutiny of corporate boards made it impossible for him to continue.

In the corporate raider days back in the 1980s, shareholders were quick to grab almost any offer that was higher than that day’s stock price. But today’s shareholders are sadder and wiser. They have seen their value siphoned off to raiders who paid only a fraction of what the companies were worth or to corporate executives granted hundreds of millions of dollars in golden parachutes and stock-option grants while doing little for their stockholders.

Shareholders want more than a couple of dollars a share. They want leadership they can believe in. Shareholders have to be able to rely on the board to represent their interest in building long-term shareholder value and not short-term CEO ego. Since mega-mergers often fail, the ability of the board to provide rigorous and objective analysis to a proposed deal, whether as acquirer or target, is essential.

Disney has been criticized for many years for a board that was overly cozy. In 1997, Disney directors were named Business Week’s “Worst board of the year” for overpaying Eisner and approving a huge guaranteed payment of more than $100 million to Michael Ovitz for his brief tenure as an executive. Many of the directors had direct ties to Eisner, including his lawyer, his architect and his son’s schoolteacher. As a result of shareholder pressure, Disney dramatically improved its corporate governance, adding outstanding new independent directors and adopting state-of-the-art policies to ensure that they provide more active and objective oversight.

The Disney board’s decision to select an independent director as chairman is, ironically, proof that it is stronger than its shareholders think. If Disney had not made a great deal of progress in strengthening its corporate governance over the past year, the board would not have been in a position to act so quickly and decisively. This decision will give shareholders a little more confidence in the board in the short term. But Eisner and the board will need to continue to prove themselves by communicating more effectively with investors on CEO succession and compensation and overall strategy and by continuing to add strong, experienced directors to add additional depth and independence.

Indeed, shareholders will insist on more from all corporate boards. A record number of shareholder proposals on issues like executive compensation and splitting the chairman and CEO positions will get record levels of support this year, and director candidates will get a record level of scrutiny. And that will lead to stronger, more effective and more responsive boards, essential for the credibility of public companies.

The vote at Disney reflects a new understanding in the investor community that corporate governance is an element of risk assessment of any investment and that vigilance in pursuit of improved governance is not just the price of shareholder democracy–it is a very good investment.”

March 5, 2004

How to Conduct Research on

I frequently get asked where are the best resources on private companies. I like because it provides ratios and financials on private companies worldwide. is probably a more reliable source, but does not have the same range of information as Skyminder. Both of these are subscription services. is a free list of the largest private companies – but there is no in-depth information available.

Foreign Corrupt Practices Act

Due to popular demand, I have created a “Foreign Corrupt Practices Act” Practice Area for members.

March 4, 2004

A 43% Withhold Vote! Wow!

Wow! The preliminary withhold vote on Michael Eisner, based on voting prior to the meeting (of course subject to final count and confirmation of inspector of election, and all the other disclaimers announced by Disney) was 43% yesterday. This is an extremely high number considering the highest withhold vote on a Fortune 100 director last year was in the mid-20s (for an “Enron” director who still sits on Lockheed Martin’s board).

Considering that roughly a quarter of the votes cast were broker non-votes – who routinely support management – more votes were actively cast against Eisner than for him. And this is all due to a media/Internet campaign against Eisner – with no proxy solicitator involved, a remarkable achievement. Also noteworthy is that three other “targeted” directors of Disney also received withheld votes in the low-20% range.

It will be interesting to see how these historic results are used to make arguments at next week’s SEC roundtable on shareholder access (eg. an argument that the proposed trigger thresholds can be easily reached and thus don’t need to be lowered versus an argument how investors would bother to actively vote if they knew their votes had consequences).

Carl’s Corner on Cumulative Voting

The March installment of Carl’s Corner acts as a Primer on Cumulative Voting.

NASD Sends Member Notice on Underwriting Rule

The NASD has sent out its Notice to Members 04-13 announcing the adoption of major amendments to the NASD’s Corporate Financing Rule–Rule 2710. The amendments were approved by the SEC on December 23, 2003 and the SEC approval order was published in the Federal Register on December 31, 2003.

As more fully explained in my interview with Suzanne Rothwell, these rule changes effect a new approach to underwriting arrangements. The Notice to Members summarizes the amendments and provides clarification regarding the application of Rule 2710 to straight debt and derivative securities. The Notice also includes the text of the amendments.