We have posted the transcript from the webcast: “Demystifying Internal Controls Disclosures.”
I have also posted an interview with panelist Linda Griggs of Morgan Lewis to cover some unanswered business from the webcast regarding the location, content and format of 404 reports.
Difficulties of Auditor Turnover
On Sunday, the NY Times ran this interesting article on how some smaller companies are losing their independent auditors at the eleventh hour.
One point that is not directly made in the article – but borne out by the end of it – is that a fair number of companies that lose a Big 4 auditor find another Big 4 firm to fill the void pretty quickly. Lynn Turner of Glass Lewis recently shared some statistics with me that reveal that this is the case more often than not. Of course, some companies are not able to do so and are forced to hire much smaller audit firms.
If You Thought Evelyn Davis Was Bad…
As we approach the annual meeting season – and with the continuing emphasis on corporate governance – Keith Bishop shares this amusing description of corporate governance in Japan (the translation is of “Kaishahou Nyuumon” – which means “an introduction to corporate law” – done by Keith’s daughter):
“Our country’s company managers have come to view general stockholder meetings as a necessary evil. Rather than exhausting doubts, everything is done to see that the formality is carried out quickly. Extortionists who threaten to disrupt stockholder meetings take advantage of the weak attitude of the managers. They threaten to disrupt the meetings and demand money. Managers also use extortionists to speed meetings along. In order to stop this phenomenon peculiar to our country, in a show a revision to the commercial law steps were taken to limit companies’ ability to furnish benefits in order to preserve the rights of stockholders. In particular, it attached penalties to officers and employees who provided illegal benefits.”
Yesterday, SEC Chair William Donaldson gave a lengthy interview to major newspapers. During the interview, Chairman Donaldson indicated that the proposed shareholder access framework would need to be altered before it could be adopted, as explained in this Washington Post article and NY Times article.
And, in this article, the Wall Street Journal wrote about Chairman Donaldson’s desire to push for better executive compensation disclosures, with “plans to work with the staff to find a way to make compensation disclosure more transparent and understandable.” The article also noted “beyond better disclosure, Mr. Donaldson said he also is concerned about performance measures some companies use to reward executives. In some cases, he said, officials may be getting paid to simply hit Wall Street estimates rather than actually improve a company’s long-term performance. I believe that performance should be paid and good performance should receive good pay, but there has to be a better definition of what real performance is, he said. Mr. Donaldson said he wants companies and boards to start paying closer attention to what metrics they use to determine compensation.”
Audit Committee Guide and Best Practices
In our “Audit Committee” Practice Area, we have posted this excellent 112-page Audit Committee Guide from Wachtell Lipton, complete with a number of model documents (bear in mind the July 2004 date of the Guide) – such as whistleblower procedures, pre-approval policy and audit committee charters (for both NYSE and Nasdaq companies). Thanks to David Katz!
Proxy Advisory Report on Disney
On the GreatGovernance.com home page, I have posted the 11-page report issued by the new proxy advisory firm, Proxy Governance, related to Disney’s annual meeting. For those of you that have never seen the types of reports upon which institutional investors typically make their voting decisions, this will be informative.
Although this year’s Disney annual meeting – being held tomorrow – won’t be as exciting as last year, there should be some excitement as former directors Stanley Gold and Roy Disney just announced that they will withhold votes for all directors because they believe the CEO succession process is lagging (but they don’t encourage other shareholders to withhold their votes; what is that all about?). Also, CalPERS announced it will withhold its votes from Michael Eisner, because it doesn’t think Eisner should remain on the board after he steps down as CEO in ’06.
Maybe not, but on Monday – as reported by the NY Times in this article – Corp Fin allowed the exclusion of shareholder access proposals submitted by major shareholders of Verizon, Qwest and Halliburton. This decision is consistent with Corp Fin’s final decision on a similar shareholder proposal submitted to Disney at the end of the year.
As I blogged back on December 30th, the shareholders tried to rely on footnote 74 in the SEC’s proposing release, which said that while the SEC was deliberating on final rules, shareholders could submit shareholder proposals that mirror the framework of proposed Rule 14a-11.
In the identical no-action responses sent on Monday, Corp Fin Director Alan Beller implied that the footnote (and the shareholder access proposal itself perhaps?) had become stale with his statement, “Given the passage of time since the proposal, we will not recommend enforcement action to the commission” if the companies omitted the shareholder proposals from their proxy materials. So with these letters, Corp Fin has basically reverted to the Division’s historical approach to election proposals under 14a-8(i)(8).
How to Use Governance Ratings
Learn how to use governance ratings in this interview with Gavin Anderson of GMI International. I was surprised by Gavin’s comments regarding the appetite of retail investors for governance ratings.
Yesterday, the SEC’s Office of Chief Accountant posted this letter regarding how to use lease accounting in restatements, including what disclosures might be appropriate in MD&A such as:
– The accounting for leases should be clearly described in the notes to the financial statements and in the discussion of critical accounting policies in MD&A if appropriate.
– Known likely trends or uncertainties in future rent or amortization expense that could materially affect operating results or cash flows should be addressed in MD&A.
The SEC noted that the MD&A disclosures should address:
1. Material lease agreements or arrangements.
2. The essential provisions of material leases, including the original term, renewal periods, reasonably assured rent escalations, rent holidays, contingent rent, rent concessions, leasehold improvement incentives, and unusual provisions or conditions.
3. The accounting policies for leases, including the treatment of each of the above components of lease agreements.
4. The basis on which contingent rental payments are determined with specificity, not generality.
5. The amortization period of material leasehold improvements made either at the inception of the lease or during the lease term, and how the amortization period relates to the initial lease term.
Shareholder Access (And More) By Gunpoint
In the latest of a string of settlements that impose governance changes on companies, Ashland has settled a shareholder derivative lawsuit brought by the Central Laborers’ Pension FundHolders that requires the company:
– to solicit institutional shareholders who hold 1 percent or more of the company stock’s for a list of candidates to nominate as independent directors
– to make a part of its governance policy its practice of requiring at least two-thirds of its board be independent directors
– to mandate shareholder approval for the adoption of stock option plans for directors or officers, and require a holding period for a portion of shares acquired by directors and senior officers through option exercises
Join us for tomorrow’s webcast – “Last Minute Planning for the Proxy Season” – to hear Amy Goodman of Gibson, Dunn; Karl Groskaufmanis of Fried Frank; David Katz of Wachtell Lipton; and Michael Ullman of Johnson & Johnson to make sure you haven’t overlooked anything this proxy season!
Also, I just posted the announcement for our March 10th webcast – “The Evolution of Due Diligence Practices (and Securities Act Liability)” – during which Bob Buckholz of Sullivan & Cromwell; Joe McLaughlin of Sidley Austin; and Michael Kaplan of Davis Polk will analyze how diligence practices are evolving in the wake of the first major court opinion in decades.
Oh, They’re Real and They’re Spectacular
On CompensationStandards.com, I continue to analyze and post 8-Ks that make compensation disclosure in the “Form 8-K Disclosure” Practice Area. Some nice ones are being filed, including some that might be useful to review when drafting proxy disclosures.
This 8-K filed by Aetna last week provides a table of what salaries the Named Executive Officers will receive in 2005; what options and long-term performance units they were just granted (and disclosure that targets have not yet been set); as well as bonuses that were just awarded for 2004 performances. Interestingly, it is disclosed that these amounts were the byproduct of “ordinary course” executive compensation decisions.
And Mark Borges just blogged about Becton Dickinson’s proxy statement which – as I pointed out briefly during his webcast last month – includes several interesting disclosures, including a tally sheet. Mark has been blogging up a storm in his “The Compensation Disclosure Blog” and he pointed out on Friday that:
As part of the Board Compensation Committee Report (page 22), BD provides a “Value of Total Compensation” table that sets out the dollar value of the total annual compensation for the named executive officers. While it doesn’t quantify every component of NEO compensation (such as retirement benefits and perquisites), it does lay out the cash compensation (salary and bonus — as well as the amounts disclosed in the “Other Annual Compensation” and “All Other Compensation” columns of the Summary Compensation Table) and the dollar value of long-term incentives (stock options, performance units, and career shares) for each executive, and totals up these amounts.
Other interesting disclosures include:
– A supplemental table to the Summary Compensation Table specifying the voluntary elective deferrals of salary and bonus in each year for each NEO (page 24).
– A description of the methodology used to calculate the incremental cost of perquisites (note 2 to the SCT).
– The grant-date present value for stock option grants using BD’s SFAS 123 valuation methodology (see my February 2nd entry on “Disclosing Option Grant Values.”)
– Separate tabular disclosure of BD’s Career Share grants made in 2004 for fiscal 2005.
Rastaman Live Up!
Yesterday was Bob Marley’s 60th b-day and it reminded me of this little ditty:
Me listen to da drummer
Me listen to da bass
Me listen to Jah music
Make me wind up me waste
As the SEC nears the time to move into its new HQ, Bloomberg reports that “Securities and Exchange Commission Chairman William Donaldson has a decision to make that will determine the outlook at the SEC for years to come: Who among the four commissioners gets the room with a view when the agency moves to new headquarters in March.
Donaldson, 73, the U.S.’s top securities regulator, says the question of who gets what office is roiling the agency. The SEC is hardly a stranger to contentious issues: past votes have covered rewriting corporate-governance rules and overseeing the $973 billion hedge-fund industry.
“For anybody that has ever made office moves, they become hot subjects,” he said in an interview in Davos, Switzerland. “We will not be an exception.”
Commissioners Roel Campos and Cynthia Glassman have made it clear they want the only office besides Donaldson’s that overlooks the Capitol, according to people familiar with the matter. Commissioner Paul Atkins has said it’s unfair for any one official to get a better office, the people familiar said. Commissioner Harvey Goldschmid, who is recovering from surgery, has mostly stayed out of the squabble.
Of the four commissioners, the three who lose will get offices looking over train tracks at Washington’s Union Station in the new headquarters.”
I say split the baby and let them share an office, like most new Staffers do – that’s how you make the best of friends while working at the Commish anyways. Just kidding…
Impact of Internal Controls on M&A
On DealLawyers.com, we have posted the transcript from our webcast, “Impact of Internal Controls on M&A.”
XBRL Off and Running at the SEC
Yesterday, the SEC established its voluntary program for eXtensible Business Reporting Language (“XBRL”) filings. Registrants may voluntarily furnish XBRL data in an exhibit to specified EDGAR filings, beginning with the 2004 calendar year-end reporting season. The effective date is March 16, 2005, which is the final day for calendar year-end accelerated filers to file their 2004 10-Ks.
For the calendar year accelerated filers planning to make XBRL filings – not sure there will be many volunteers – note that the new rules do not become effective until March 16, the final day for filing the 10-K. If a company files before March 16, the new rules – including the limited protection from liability – would not yet be in effect.
Mike Holliday notes that those companies ready to experiment with XBRL should consider not making the XBRL filings until on – or after – March 16. Even if the 10-K is filed before March 16, the XBRL documents can be provided later in an amendment to the 10-K or in an 8-K.
Yesterday, the plaintiffs pulled out of the proposed settlement under which 10 former WorldCom directors would personally pay $18 million of a $54 million settlement. New York State Comptroller Alan Hevesi, the lead plaintiff, announced that the plaintiffs were pulling out of the deal after U.S. District Judge Cote struck down a key component of the agreement yesterday.
Judge Cote ruled in this order that any jury award resulting from the February 28 trial could not be reduced using a formula that would have taken into account the limited finances of the directors who settled. Some investment banks that were defendants in the case had objected to the settlement, telling the Judge that they would be unfairly prejudiced unless all the defendants stood trial together.
Here is a more technical explanation from Mike Holliday: The Stipulation of Settlement has a condition that the amount of the reduction of any verdict or judgment against a non-settling defendant in the action be limited to the greater of the “Settlement Credit” or the “Contribution Credit.” The “Settlement Credit” is simply the total settlement amount of $54 million to be paid by the settling directors ($18 million) and the insurers ($36 million) plus any interest. The other prong of the maximum reduction is more complicated. It would be the contribution claim non-settling defendants would be entitled to assert against settling directors equal to the aggregate proportionate shares of liability of settling directors (determined by the Court), BUT ADJUSTED to reflect any limitation on the financial capability of settling directors to pay their proportionate shares of liability. Absent Court approval of this provision relating to the Settling Director’s ability to pay, the Lead Plaintiff is entitled to terminate the Settlement.
Judge Cote’s order denied the application to approve the judgment reduction formula insofar as the “Contribution Credit” is “adjusted to reflect any limitation on the financial capability of the Settling Director Defendants, ” as a violation of 15 U.S.C. Sec. 78u-4(f)(7)(B)(i). There will be an opinion to follow that will explain the reasons.
Under Subsection (f)(7)(B), which is part of the Private Securities Litigation Reform Act, where a defendant (covered by the Subsection) enters into a settlement prior to final verdict or judgment, the verdict or judgment is to be reduced by the greater of (i) “an amount that corresponds to the percentage of responsibility of” that settling defendant; or (ii) “the amount paid to the plaintiff by” that settling defendant. In this case, the provision in question in the Settlement could have reduced the amount in (i). That could decrease the amount by which any final verdict or judgment is reduced, which would have the effect of increasing the amount of any final verdict or judgement required to be paid by non-settling defendants.
Yesterday, the NYSE released the 142-page Webb Report that details how Dick Grasso was paid when he ran the NYSE. Here is Grasso’s response.
The NYSE released the Webb report – named for attorney Daniel Webb who compiled it – after a judge overseeing New York Attorney General Eliot Spitzer’s suit against Grasso ruled last week that it was not subject to attorney-client privilege. Here are some comments on the report culled from a longer article in the Washington Post:
– The report in many ways tracks Spitzer’s complaint, although it offers no legal conclusions or analysis. The report generally concludes that Grasso’s pay was unreasonable and that Grasso had undue influence over his own compensation, chiefly by controlling appointments to the board and the compensation committee.
– The report concludes that Grasso’s pay was incorrectly based on compensation for chief executives at much larger, publicly traded companies. And it says the composition of the board and the compensation committee changed too often for directors to attain full understanding of the nature of Grasso’s complex pay arrangements.
– The report says Grasso’s executive assistant was paid $240,000 per year for the last three years of Grasso’s tenure and that Grasso used the services of two drivers on the NYSE payroll, each of whom earned about $130,000 per year.
I will blog further after I analyze the report myself. It will be interesting to see what Michael Melbinger blogs on CompensationStandards.com, since he is with the law firm, Winston & Strawn, that prepared the report.
Musical Lawyers and Accountants for Scrushy
Yesterday’s WSJ article about how the Scrushy defense team has rotated extensively over the past 20 months is one of the more fascinating “reveals” I have read lately.
My favorite quote from the article is from my pal Mike Mulligan, who served as a foresenic accountant for a period of time for the defense team: “I’ve never seen a case of this profile involve a shift from law firm to law firm and accounting firm to accounting firm,” said accountant Michael Mulligan, the executive director of FCL Advisors International LLC, Great Falls, Va., who was replaced as a forensic accountant on Mr. Scrushy’s team. The turnover, he added, “in some ways is even bizarre.”
On CompensationStandards.com, the transcript is available for the popular webcast: “What NOW Needs to Be Disclosed in the Proxy Statement.” Since the webcast lasted well over 2 hours, it is quite a sizable transcript.
Summary Sheets for NEO Compensation
On CompensationStandards.com, I answered a question yesterday in the Q&A Forum that has been asked more than once. The question was: In view of recent SEC guidance, we’re considering filing as exhibits to our next periodic report a summary sheet for comp arrangements for each NEO. Are others considering this as well? Has anyone seen examples filed for other companies? What categories need covered and at what level of detail?
After reading Alan Dye’s remarks from the transcript noted above, I answered that FAQ 5 is pretty clear regarding directors – and directors and NEOs are treated the same under both 8-K and Item 601, so I don’t know how you escape the conclusion (unless you just disagree with the Staff, as we hear some people do).
I like what American Express filed on a Form 8-K on January 28th. It includes details about salary levels and option and restricted stock awards for both 2005 and 2004; bonus levels for 2004 and 2003; LTIP payouts for recent performance periods – as well as what the directors fees will be for 2005. I imagine this is what some of the summary sheets might look like.
The Final Standard: Option Expensing is Here – Are You Ready?
The Oakland Tribune reports that a former E&Y partner – among the first charged with document destruction under SOX – has been sentenced to a year in federal prison for his role in falsifying or destroying documents to impede a SEC probe.
In pleading guilty in October, the partner acknowledged that in April 2003 he testified under oath to the SEC regarding audit work his team had performed on NextCard (a company whose collapse the SEC was investigating) and he didn’t bother to mention that documents related to NextCard’s audit and quarterly working papers had been altered, with considerable parts deleted in November 2001. The partner later admitted this was a cover-up meant to impede the SEC’s probe.