Monthly Archives: October 2005

October 31, 2005

Today is the “2nd Annual Executive Compensation Conference”

You will be able to access the video webcast on the home page of – here are the course materials. Hope to see some of you there, at the NASPP Conference the next day – or at the PLI Conference in NYC at the end of the week (stop by our booth)!

Pfizer Tweaks Majority Vote Governance Guideline

On Thursday, Pfizer amended its majority vote governance guideline to clarify how it will be applied in the event that any director receives more “withheld” votes for his or her election than “for” votes.

Pfizer’s amended corporate governance principles now state that:

– The board will act on a director’s offer to resign within 90 days following certification of the shareholder vote

– The board will promptly disclose, via a press release, its decision to accept the resignation offer or, if applicable, the reasons for rejecting the offer

– The majority voting policy will be limited to uncontested director elections

– Any director who tenders a resignation shall not participate in any consideration by the board of the resignation offer

More PCAOB Inspection Reports Posted

Last week, the PCAOB posted more than two dozen new inspection reports (they relate to inspections conducted during 2004). During the past few weeks, the PCAOB has issued the 2004 inspection reports for Deloitte and KPMG – E&Y and PwC should be coming shortly. All of the PCAOB’s inspection reports are posted on this page.

October 28, 2005

DOJ’s Process for Approval of Attorney-Client Privilege Waivers

Many in the private bar have been concerned about the pressure put on the attorney-client privilege as a result of the Thompson Memo since early 2003. Apparently, the Department of Justice has recognized these concerns and is implementing a process for supervisory approval, as reflected in this DOJ memo that we have posted in our “Attorney-Client Privilege” Practice Area.

Course Materials for Executive Compensation Conference

We have posted the course materials for the “2nd Annual Executive Compensation Conference.” For those watching by video webcast on Monday, I urge you to print off the materials posted under “Speaker Materials” for each panel in advance – particularly ones labeled as “Talking Points” as those closely dovetail with what the speakers will discuss.

SEC Names Two Deputy Directors for Enforcement Division

Yesterday, the SEC announced the appointment of Walter Ricciardi and Peter Bresnan as Deputy Directors of the Division of Enforcement. Enforcement now follows in the footsteps of Corp Fin in maintaining two deputy director positions, as the layers of management continue to grow along with the overall size of the SEC Staff.

October 27, 2005

COSO Proposes Internal Controls Framework for Small Businesses

Yesterday, COSO proposed much-needed guidance on the use of its internal controls framework to address the needs of smaller businesses. This 207-page exposure draft outlines 26 fundamental principles associated with the 5 key components of internal control: control environment, risk assessment, control activities, information and communication; and monitoring.

Here is a SEC press release praising COSO’s proposal and seeking comment on its own internal control actions.

Chancellor Chandler Speaks on Executive Compensation

On Tuesday, at the NACD Annual Conference, Chancellor Chandler spoke on excessive executive compensation. As noted in this Reuters article, Chancellor Chandler said “”If neither the courts nor the markets are able to restrain executive compensation, and if you the decision-makers fail … the result will be imposition of regulatory controls” and “The entire matter of executive compensation, which seems in some cases to have come spectacularly unhinged from the market for corporate talent, will either be regulated by you the fiduciaries, or by the politicians.” That’s some pretty strong language for those of you looking to interpret the Chancellor’s Disney opinion.

In the past few months, I have listened to about a half-dozen panels talk about the Disney case and not a single one has mentioned that the case has been appealed – yes, there will be a new Disney opinion coming out of the Delaware Supreme Court sometime in 2006.

RealPlayer Not Available for Monday’s Video Conference

We have just learned that Hurricane Wilma has impacted the company that will be streaming the simultaneous live video webcast of the “2nd Annual Executive Compensation Conference” – so you will NOT be able to watch the video of the conference using RealPlayer.

However, Windows Media will still work to watch the Conference on Monday (and we are told that we will have the archived video available for RealPlayer – but we don’t know when yet).

Most computers have Windows Media already installed, if yours does not – you can download it here. We have extended the test for those who may have tested for RealPlayer – you should now test using Windows Media if you plan to watch the Conference on Monday.

The Convergence of Hedge Funds and Its Impact on M&A

On, we have posted the transcript for the popular webcast: “The Convergence of Hedge Funds and Its Impact on M&A.”

October 26, 2005

The Legal Status of Majority Vote Governance Guidelines

Here is some food for thought: what legal status is afforded the corporate governance guidelines that NYSE-listed companies are now required to have (and many Nasdaq companies have adopted voluntarily)? I don’t believe there is any Delaware caselaw in this area yet.

In this podcast, Mike Hanrahan, a Partner of Prickett Jones & Elliott, brings his perspective as a litigator to bear on the legal status of voluntary corporate governance guidelines and other matters, including:

– As a litigator, what issues do you see if companies adopt voluntary corporate goverance guidelines regarding directors tendering their resignations if they receive more “withheld” votes than “for” votes?

– How does the recent News Corp flap over its poison pill further reflect issues raised by board policies?

– Do you think more lawsuits will be filed over excessive executive pay issues? Is this a growing trend?

New Proposed Settlement in Fairchild Executive Compensation Lawsuit

Yesterday’s Washington Post carried this article about the new settlement proposed by the parties over the excessive compensation received by Fairchild executives. As noted on (along with the original complaint), Vice Chancellor Strine rejected the first settlement and told the parties to “get something real,” according to the Post article. VC Strine will consider the new proposed settlement in a hearing on November 23rd.

Below are some bullets from the proposed settlement, as filed by Fairchild in a 8-K:

– executives would have to pay business expenses out of pocket and then seek reimbursement

– an oversight committee of outside directors would review executive expenses

– the CEO would have to pay $833,333 personally to defray legal expenses

– the company would save $933,000 in contributions to the CEO’s retirement plan this year and discontinue two life insurance policies for the CEO, saving $150,000 in annual premiums

– the company would have to negotiate a new employment agreement with the CEO

October 25, 2005

Move to Second Tier Auditors?

According to this article, so-called second-tier accounting firms such as Crowe Chizek, Grant Thornton, BDO Siedman, and RSM McGladrey have capitalized on the relative shortcomings of the Big Four and picked up 417 ex-Big Four clients since 2003. I’m not sure how many of those are public companies – and find it hard to believe that too many are, based on what I blogged about a while back.

Last week at the Association of Corporate Counsel Annual Conference, I was a little surprised to hear Kayla Gillan, one of the PCAOB Board members, urge companies to drop their Big 4 auditors in favor of the second-tier firms. I understand the real need for the existing oligopoly to be broken (since the Big 4 now essentially live in a “too big to fail” world), but I believe market forces – not regulators – should motivate companies to diversify whom they select, unless regulators have more concrete reasons to provide guidance on which auditor to select (eg. if PCAOB inspections revealed that certain auditors are a higher risk than others).

Kayla acknowledged the practical limitations faced by most larger companies (eg. D&O insurer won’t allow company to use an auditor outside the Big 4) – but if I were selecting an auditor, I would also worry about the quality of auditing at the second tier firms just as much as any other firm. To wit, Grant Thornton sure has its hands full with the recent Refco implosion!

Is Kayla Gillan a Short-Timer?

As I blogged a month ago, Kayla’s term as a PCAOB Board member expires at the end of this month – and still no word as to whether SEC Chairman Cox will reappoint her for another 5-year term. Unlike for SEC Commissioners, there is no provision for Kayla to stay in office on a holdover basis (eg. until a successor was found or to conduct further deliberations), even if that is what the SEC Chair wanted. From all accounts, Kayla has been well-received as a PCAOB Board member and many have written letters in support of a second term.

Test Your Ability to Receive Conference Webcast – Today!

With Ed Woolard delivering the opening keynote at yesterday’s NACD Annual Conference, the Sunday NY Times article discussing Mr. Woolard’s 10-minute video was mentioned repeatedly – and the phones at our HQ are ringing off the hook for those that waited til the last minute to register for the “2nd Annual Executive Compensation Conference.”

Right now – you should test your ability to receive video streaming if you have registered for the Conference. Please don’t wait until later this week as testing is only available today and tomorrow.

October 24, 2005

How to Slow Runaway Executive Pay

Looks like the NY Times also loves the “double bull” quote from Ed Woolard’s inspiring 10-minute video, as I blogged last week. From yesterday’s NY Times by Gretchen Morgenson: “While investors have railed about skyrocketing executive pay, lo these many years, the response from executive suites has been a confounding silence. Even directors, who have a fiduciary duty to put shareholders’ interests before those of managers, have been unwilling to stop the insanity.

Last year, the average pay package for chief executives at big companies came in at $10 million, up 13 percent from 2003. In view of the pension and health insurance givebacks being forced upon lower-level workers, this surge is especially obscene.

That the people on the receiving end of these enormous transfers of shareholder wealth want them to continue is no surprise. What’s-in-it-for-me is the way we live now. Still, letting excessive pay escalate every year hurts the already battered reputations of American executives. From that standpoint, the silence has been baffling.

Finally, however, a C.E.O., albeit an emeritus one, is talking tough about outrageous pay and pliant boards. In a taped speech – aimed at directors – that will be shown at a compensation conference on Oct. 31 in Chicago, Edgar S. Woolard Jr., the former chief executive of DuPont and the current chairman of the New York Stock Exchange’s compensation committee, debunks the main myths of executive pay.

Mr. Woolard, 71, does the debunking with style. He has one word, for example, to describe the notion that chief executive pay is driven by competition: “bull.” And to the idea that compensation committees are independent, he says “double bull.”

What about the doctrine that chiefs are owed stupefying amounts because they create wealth for shareholders? “A joke,” Mr. Woolard says.

“I honestly don’t understand why more C.E.O.’s aren’t concerned about the image of business leaders in general,” Mr. Woolard said in an interview. “They don’t seem to have the same perception I do that business leaders are beginning to be thought of as politicians and labor union leaders and other types of individuals who don’t have the right respect. So I’m speaking out because I would like to encourage other current C.E.O.’s to provide the leadership to begin to make the change to more rational compensation.”

For example, he said, most people do not know that compensation committees are not independent of the chief executive. He described the workings of these typically close relationships:

“The compensation committee talks to an outside consultant who has surveys that you could drive a truck through and pay anything you want to pay, to be perfectly honest,” Mr. Woolard says. “The outside consultant talks to the H.R. vice president, who talks to the C.E.O. The C.E.O. says what he’d like to receive. It gets to the H.R. person who tells the outside consultant. And it pretty well works out that the C.E.O. gets what he’s implied he thinks he deserves, so he will be respected by his peers.”

Mr. Woolard said directors should solve this problem by barring compensation consultants from discussing pay with anyone inside the company. Rather, the consultant should offer pay ideas to the company’s compensation committee, which should discuss the matter only with human resources people. “At the New York Stock Exchange our outside consultants do not get any comments or sense of direction from the C.E.O. or H.R. person,” he said.

While executives often contend that their pay is driven by competition, Mr. Woolard counters that the outside consultants are in control. If the consultants want to be rehired in future years, they will not want to hurt their chances by suggesting that a chief receive less than his or her peers do.

“Boards have been led to accept the logic that if ‘our C.E.O.’ is not in the top half, it implies to employees and to the general public that the board may not have confidence in the C.E.O.,” Mr. Woolard said in the interview. “For some crazy reason it’s been translated to, ‘If you paid me at the bottom quartile, people would think you’re about to get rid of me.’ All that is honed by these outside consultants; they’ve gotten rich by providing this framework and the logic of the top quartile, and the boards have accepted it.”

A solution, Mr. Woolard said, is a strategy known as internal pay equity, which he put into practice at DuPont in 1989. It starts with an examination of the average pay given to the handful of senior managers running a company’s divisions; the chief executive’s compensation is then based on a premium set to those pay levels.

“We took the level of the senior v.p.’s, the people who make very major decisions about the businesses underneath them,” Mr. Woolard recalled. “And we asked the outside consultant to make a survey of how other companies pay people at that level, which is not escalating greatly. Then we put a cap on the C.E.O.’s total compensation not exceeding 50 percent of that.” The chief executive, therefore, is taken out of the peer-group horse race that propels pay into the stratosphere.

Finally, Mr. Woolard knocks down the notion that chief executives deserve their riches because of the shareholder wealth they have created.

“During the 1990’s with the stock market bubble and the major temporary wealth created for shareholders, this philosophy that ‘I am doing so great for my shareholders, I certainly deserve a fairly significant portion of the benefit,’ permeated across companies and boards,” Mr. Woolard said. “Now, my concern is that the stock market bubble burst and many shares declined significantly but the base of C.E.O. compensation that was built during that artificial period is a base that is still used today. Because the surveys of the outside consultants are primarily built on compensation for the last five years, there’s no way for those surveys to decline.”

In other words, a lot of these emperors have no clothes.

Jesse M. Brill, a securities lawyer who is chairman of the National Association of Stock Plan Professionals, a sponsor of the Chicago conference, said the video of Mr. Woolard’s speech should be required viewing in every public company’s boardroom. Mere mortals can view it, too.

“It all goes back to accepting that this is a significant problem,” Mr. Woolard said, “and thinking very carefully about it at the compensation committee and the board, and not allowing the C.E.O. to have any input into the process.”

Won’t it be interesting to see if any of Mr. Woolard’s peers join him in battling chief executive greed or if directors start to take up this fight? It would be a shame if the silence from the corner office just continued.”

Only one week from today! Register now for the “2nd Annual Executive Compensation Conference.”

The Other Side of the Coin

This should only support Mr. Woolard’s contention that CEOs are not held up so highly anymore – here is a recent article that details how a CEO disputes the $240,000 ran up on his corporate credit card for attending a topless club. The CEO says it was only $20,000. Wonder if that will make it into the company’s proxy statement as perk disclosure…

October 21, 2005

Delaware Law and Compensation Issues

The “2nd Annual Executive Compensation Conference” will open with a videotaped panel on director duties and liabilities featuring Delaware Supreme Court Chief Justice Myron Steele; Delaware Vice Chancellor Stephen Lamb; and Professor Charles Elson, Director of the U. of Delaware Center for Corporate Governance

Here is a teaser of just a few of the many issues that will be addressed by this panel:

Meaning of the Disney opinion – “The opinion should be read as a warning signal rather than a free pass.”

Hiring compensation consultants – “If you interview a compensation consultant and all they bring to the table are benchmarking surveys to establish a pay package – I would be very leery.”

Reliance on experts – “Simple reliance on the comp consultant I don’t think gets you there. You’ve got to go beyond that.”

Director independence – “I think if you have a charitable link to the company or to the manager of the company, it does influence your thinking”

Minute-taking and board materials – “What’s important to note in the minutes – if there’s a dissenting opinion, I think the dissenting opinion needs to be recognized.

With one week to go, act now to register to attend in Chicago or by video webcast.

Implementing a Majority Vote Governance Guideline

Watched a rousing panel on the majority vote movement at ISS’ Annual Conference yesterday – so far this year, shareholder proposals on this topic have averaged support of 44%, a high level for a “first run” type of proposal. If you haven’t been following developments – and the arguments involved – it’s time to get up-to-speed. Here is an ISS article on how the access rule might have crawled out of the grave.

Recently, Microsoft joined the growing list of companies to adopt some form of voluntary governance guideline pertaining to the majority vote standard. In this podcast, John Seethoff, Vice President and Deputy General Counsel of Microsoft Corporation, explains how to implement a corporate governance guideline regarding the tender of a resignation from a director that receives a majority of votes withheld, including:

– What exactly did Microsoft do? And why?
– Under what circumstances do you think a board might exercise its judgment not to accept a director’s tender?
– In what form would you expect directors to tender their resignation under this type of guideline?
– Do you think the tender of a resignation would trigger a Form 8-K filing?
– What do you recommend that the rest of us do to become educated and more involved regarding the majority vote movement?

October 20, 2005

NYSE May Flag Companies Not in Compliance with Governance Standards

Buried in yesterday’s WSJ (and not available electronically), it was reported that the NYSE is considering “branding” listing companies that violate the NYSE’s governance standards, perhaps using a flag added to the stock symbols of the companies in violation (akin to the “lf” flag now used for companies that file their periodic reports late).

The article also notes that the NYSE is considering amending its standards to clarify the disclosure requirements regarding director independence due to a “wide range of differences in the disclosures” provided by listed companies to date. We first flagged this issue back in June.

FASB Issues Staff Position on Option Grant Date Issue

On Tuesday, the FASB issued FAS 123(R)-2 which recognizes the board/committee decision date as the grant date if the grant is unilateral and is communicated within a short period of time. Here is a blog with background on this issue.

Internal Controls Update: The Big 4 Speak

We have posted the transcript from our recent webcast: “Internal Controls Update: The Big 4 Speak.”

October 19, 2005

Is How You Pay the CEO Patentable?

If you think absurb results only occur in the corporate & securities world, look at the recent decision by the Patent Office in Ex parte Lundgren, overturning a patent examiner’s rejection of a patent claim to a “method of compensating a manager ….” Learn more about this case in the Conglomerate Blog.

Long Live SARs!

When they came out at the end of September, Julie blogged about the proposed IRS regulations regarding implementation of Section 409A of the Internal Revenue Code (as enacted in last year’s deferred compensation legislation). Mike Melbinger has blogged multiple times about various aspects of this topic in his blog.

Let me focus a little more on how SARs are proposed to be treated – the proposed regulations exempt all SARs from Section 409A so long as the exercise price of the SAR is not less than the fair market value of the underlying shares on the date the SAR is granted. This change should make SARs more attractive, particularly since 123(R) will value SARs in much the same manner as stock options for purposes of determining an employer’s compensation expense. The bottom line is that stock-settled SARs now offer many advantages to companies and, under FAS 123(R), are an attractive alternative to stock options.

Those of you attending the NASPP Annual Conference will want to attend these two panels: “The New Cashless Exercise: Stock Settled SARs” and “How to Implement a Broad-Based Stock-Settled SAR Program.”

Memos about the New 409A IRS Regulations

A number of members have asked if we have posted law firm memos on the proposed IRS regulations. We have hordes of them in Section E.29 of our “Law Firm Memos.”

October 18, 2005

Analysts and Soft Research

Lots of news lately about the relationships between analysts and the companies they cover. For example, it was widely reported last month that the SEC was looking into Altera Corporation and its alleged retaliation against an analyst.

Maybe I am missing something, but I think the SEC might need to create new rules here – because the potential cause of action is not clear to me as companies aren’t obligated answer questions from everyone who calls. I understand why retaliation doesn’t seem fair to analysts or good for investors – I just don’t see the legal basis for an enforcement action under the existing regulatory framework.

How about the story a few weeks back about how Cyberonics’ CEO objected to the hiring of some students by an analyst to crash an invitation-only video conference meeting during which the company’s new medical devices were discussed, as fleshed out in a September 7th WSJ article. I can understand how this could be irksome to a company due to the misrepresentation involved. On the other hand, this seems to be the type of soft research that the SEC encouraged when it adopted Regulation FD.

Along these lines, check out the website for the Gerson Lehrman Group. This summer, this site made the news due to this August article in the Seattle Times, which detailed how doctors involved in confidential studies were hired to leak results for the benefit of hedge funds and other clients. Here is a rebuttal to the Seattle Times piece from the Gerson Lehrman Group.

Don’t assume that your employees would laugh at the side money offered by groups like Gerson Lehrman. Despite the fact that your research people might have signed confidentiality agreements, I have spoken to more than a few companies whose employees didn’t realize that they weren’t allowed to communicate with the outside world about their studies. As part of the company’s compliance culture, it certainly makes sense to periodically remind them that such side arrangements would violate their employment conditions, etc.

Pleathora of Sarbanes-Oxley Articles

Yesterday, the WSJ carried a spection section on “Living with Sarbanes-Oxley,” including this article on “governance by gunpoint” with a quote from yours truly.

Winning Strategies in Auctions

We have posted the transcript from the webcast: “Winning Strategies in Auctions.”

Also on, in this podcast, George Casey of Shearman & Sterling discusses the SEC’s Divisions of Corporation Finance and Market Regulation jointly issued no-action and exemptive letter to Axel Springer providing relief under the tender offer rules (Axel Springer, a German stock corporation, made a cash tender offer for another German company), in particular focusing on the following questions:

– What is the significance of the SEC giving a cross-border relief in connection with an offer for a company that does not qualify as a “foreign private issuer”?
– It appears that the bidder would be permitted to pay for the tendered shares with a significant delay after the expiration of the offer period. Why was this relief necessary?
– Is the “prompt payment” relief likely to become recurring in German offers?
– The bidder will give withdrawal rights after the expiration of the offer. Why is this necessary?

Are You the MOH in Your Office?

Today’s Dilbert reminded me of the hilarious skit at yesterday’s Association of Corporate Counsel Annual Conference about widespread persecution of the “male office honey.”