March 31, 2006

SEC Chair Sounds Off on Executive Compensation

Yesterday, SEC Chairman Chris Cox gave a speech before the Council of Institutional Investors. I like the way he debunked the theory that movie stars and athletes currently get paid in the same manner as CEOs in today’s world (by noting that market forces don’t universally set the levels of both these days, as boards “don’t always negotiate at arms’ length with their executives”). And here is an excerpt from the Chairman’s speech regarding why the SEC has proposed changes to executive compensation disclosures:

“Executive compensation matters — not only because if moral hazards inherent in these conflicts of interest are unchecked, executives will be paid too much, but also because it can play a valuable role in disciplining management across the board, and in protecting the entire range of shareholder interests.

By restraining executives from self-indulgent behavior — and using salary, bonuses, options, long term benefits, and other financial incentives in very purposeful ways — compensation committees acting on behalf of the shareholders can increase management’s incentives to improve corporate performance.”

Director Attendance at Annual Meetings

Since the beginning of 2004, Item 7(h)(3) of Schedule 14A has required companies to disclose their policy, if any, with regard to directors’ attendance at annual meetings, including stating the number of board members who attended the prior year’s annual meeting.

Thanks to Jeff Hopkins of Equilar, below is some analysis of fifty S&P 200 companies that have recently filed proxy statements:

– 64% of these companies disclosed 100% attendance by directors at the last annual meeting
– 22% of these companies disclosed one director missing the last annual meeting
– 8% of these companies disclosed two directors missing the last annual meeting
– 4% of these companies disclosed more than two directors missing the last annual meeting
– the median attendance was 100% and the average attendance was 95%

Of these 50, the company with the lowest attendance was Coca Cola Enterprises with only 8 of 16 directors attending – in contrast, Coca Cola Company disclosed that 13 of their 14 directors attended their annual meeting.

As a sidenote, it appears that roughly 12% of corporate governance guidelines out there mention attendance at the annual meeting by directors (but not all require attendance). Thanks to The Corporate Library’s Board Analyst for this last tidbit…

Interagency Advisory Impact on Auditor Engagement Letters

In this podcast, Barry Abbott of Howard Rice provides some analysis of a recent final interagency advisory – collectively issued by the Treasury Department, Fed Reserve, FDIC, OTS, OCC and NCUA – that informs financial institutions’ boards and senior managers that they should not execute agreements that incorporate unsafe and unsound limitation of liability provisions in their engagements with independent auditors, including:

– What is the interagency advisory on external engagement letters? And what does it state?
– Should any company other than financial institutions worry about this advisory?
– How might the advisory impact engagement letters generally?
– What do you recommend that companies now do with their audit engagement letters (eg. disclose limitations, negotiate harder, etc.)?