January 27, 2006

NYSE’s Procedures Change for Delinquent Filers

Last week, the SEC approved a NYSE rule change to change the procedures that delinquent filing companies must follow. Under revised Section 802.01E, the NYSE has:

– adopted separate criteria for monitoring the continued listing status of those companies that have a position in the market (relating to both the nature of their business and their large publicly-held market capitalization) such that delisting from the NYSE would be significantly contrary to the national interest and investor interests (notwithstanding a delay in an annual report filing that extends beyond one year); and

– shortened the initial monitoring period for companies that miss their filing due date from 9 months to 6 months

– lengthened from 3 months to 6 months the additional period that the NYSE may grant companies prior to the commencement of suspension and delisting procedures

Phyllis Plitch notes in her article that Fannie Mae stands to benefit the most under this controversial rule change. We will be posting more information about these new procedures in our “Delisting” Practice Area.

FASB to Clear Up Another Option Expensing Issue

From Mike Melbinger’s Compensation Blog: “While we wait for the SEC’s executive compensation proposals, the FASB continues to issue helpful interpretations – “FASB Staff Pronouncements” or “FSPs” – on some of the more frightening issues that have arisen under FAS 123R.

Last week, it issued a proposed FSP addressing the problem of options that may be settled in cash under certain circumstances (usually only upon certain types of changes in control). The proposed FSP seems to require that options or similar instrument be classified as liabilities, rather than compensation, if “the entity can be required under any circumstances to settle the option or similar instrument by transferring cash or other assets.” (Paragraph 32). For liability awards, compensation expense must be recognized in the same manner as for stock-settled awards, but the fair value is remeasured each quarter, based upon any change in the market value of the stock covered by the award.

Provisions that allow options to be settled for cash upon certain changes in control are important for a variety of reasons and included in most well drafted option plans or award agreements (as discussed in my April 29, 2005 Blog). Thus, simply eliminating this feature from plans and award agreements is not a satisfactory alternative.

Rather than require that options be classified as liabilities if they could be settled for cash under any circumstances, the FSP would allow the company to apply a “probability” standard that assesses the probability that that the change in control circumstance would occur. Since the “change in control” circumstances under which most plans permit options to be settled for cash are relatively rare, this could be a good result for companies.”

Governance Reform Report Card

Yesterday, I was chuckling about the Washington Post’s article about how governance reform has fared, particularly the “report card” from four experts. On how executive pay is working, Harvey Pitt gave a grade of “D” and Nell Minow gave it an “F” – on the other hand, the Business Roundtable Governance Task Force Chair gave a grade of “B” and a Professor gave a grade of “B+.” The academic gave exec pay practices higher marks than a member of management!

I have been battling a few academics on the pay issue for the past several weeks, such as a rebuttal to two Wharton professors yesterday who wrote that pay might not be excessive because its high levels could be a result of supply/demand and the complexities of the global market. Those two labels are just too easy to apply without some explanation; I feel they fail to take into account the “real world” causes that we have extensively written about in The Corporate Counsel.

Or consider this excerpt from a recent WSJ article: “The average CEO’s salary in the U.S. is 40 times greater than the average worker’s salary. In Japan, it is 11 times greater; in France, 15 times; in Canada, 20; in South Africa, 21, and in Britain, 22.”

This morning, I posted the following comment to a blog regarding the Washington Post article from Professor Ribstein:

Two thoughts:

1. Executive compensation reform doesn’t have to come from the regulators; in fact, it shouldn’t. Rather, it should come from those primarily responsible – boards and their advisors.

2. Compensation reform can help to stop corporate fraud because the incentives to commit fraud could be minimized. Why do you think numbers were smoothed so much over the past decade? Likely because option grants became a routine annual event (when they originally were never intended to be so).

Executive compensation is well-known to be at the heart of corporate governance – yet, Sarbanes-Oxley and all the other recent governance reforms didn’t touch executive compensation. That time has come.

Bill McDonough may not know how to properly pay executives – but many that practice in the field do. For example, here are four simple tools we recommend to ensure that pay is appropriate:

1. Tallying ALL Components
2. Internal Pay Equity
3. Accumulated Gains Table
4. Hold Until Retirement