April 11, 2006

US Sentencing Commission Acts to Reverse Culture of Waiver

Last Wednesday, the US Sentencing Commission voted to remove the provision on waiver of the attorney-client privilege and work product protections that was added in 2004 to the Commentary to the Sentencing Guidelines for organizations (the provision to be removed is the last sentence in Application Note 12 of the Commentary to Section 8C2. 5).

Although the provision in the Commentary to be removed is worded in the negative – waiver is not required unless “necessary in order to provide timely and thorough disclosure of all pertinent information known to the organization” – the exception had become the rule and many hope that the Commission’s action is a significant step in reversing what some have referred to as a “culture of waiver.”

Many commenters had urged the Commission to remove the existing language and replace it with an express statement that waivers of the attorney-client privilege and work product protections are not to be considered in evaluating the level of cooperation or determining the appropriate sentence. It doesn’t look like the Commission went that far.

The next step is that the Commission will submit the removal of the waiver provision and other amendments it approved to the Sentencing Guidelines, to Congress on May 1st. Unless Congress takes affirmative action to modify or disapprove an amendment in the submission to Congress, the change will become effective on November 1st. Learn more from memos posted in our “Sentencing Guidelines” Practice Area.

Director Pay Rises 14%

According to a new ISS study, total director pay increased by almost 14% last year, from an average of $126,325 in 2004 to $143,807 in 2005. The jump comes on the heels of a more than 23 percent increase from 2003 when total average pay stood at $102,400. The press release includes this quote from me: “Boards need to tread carefully here as more investors are seeing director pay as the next governance battle,” Romanek warns. “And more importantly, since directors set their own pay levels, greater pay might lead to courts finding independence of boards compromised if pay is set too high. This is a universal claim in every compensation lawsuit brought in the last few years and likely will continue to be so.”

Coke’s New Director Pay Plan

Quite a bit of discussion over Coke’s new director pay plan adopted last week. As noted in this Form 8-K, the company’s new director pay package entitles each director to receive stock equal to $175,000 annually – but the shares will be payable in cash after a three-year period only if the company meets a target of 8% compounded annual growth in earnings per share. The company says it will use its 2005 earnings per share of $2.17 as the base for the growth calculation. If the target is not met, all share units and hypothetical dividends would be forfeited.

It is quite rare for directors to have an “all-or-nothing” pay package and a number of commentators have expressed concerns over its design, such as “the approach would make directors fixated on earnings and undermine their role as watchdogs.”

One member reminds me that SPX just settled a lawsuit over director participation in its annual bonus plan, as it seems the company’s directors could not resist adjusting the performance calculation to increase the size of the bonus pool. In the UK and Australia, directors that participate in company incentive plans are no longer considered independent – a real danger since the plaintiff’s bar routinely fixates on the independence of directors when bringing a lawsuit against a company.

Another member notes that director stock options have been criticized as providing directors an incentive to look the other way at Enron and Worldcom – this criticism is aimed generally at all incentive plan participation because directors are fiduciaries for shareholders, they do not operate the company. Linking their pay directly to financial results, the domain of the executives, is inconsistent with their duties and responsibilities.

Notes from Stanford’s Executive Compensation Program

On, under “The SEC’s Proposals,” we have posted notes from last week’s Executive Compensation Program hosted by Stanford’s new corporate governance center.