May 31, 2006

Early Contender: Governance Poster Child of the Year

It was mind-boggling to read Joe Nocera’s account of last week’s Home Depot annual meeting in his column in Friday’s NY Times (which followed this Wednesday article about CEO Nardelli’s pay package). Talk about a domineering CEO! I find it hard to believe in this day and age that a board – not to mention a CEO – could be so deaf to shareholders and apparently blind to what’s expected of them. It’s a textbook example of how not to hold a shareholders’ meeting.

I couldn’t resist calling up Rich Ferlauto, who is Director of Pension Investment Policy for the American Federation of State, County and Municipal Employees, to discuss – in this podcast – what it was like to personally experience the Home Depot annual meeting, as well as ask Rich how AFSCME’s shareholder proposals were received during this proxy season so far.

SEC Commissioner Campos Willing to Consider Notion of Shareholder Approval of Compensation Disclosure

If you listen to Rich’s podcast, you will hear how AFSCME’s proposals regarding shareholder approval of compensation disclosure have done quite well in their first year. As I blogged about yesterday, the House recently held a hearing on a bill that would require public companies to obtain such shareholder approval.

Earlier this month, SEC Commissioner Campos touched on this topic – and other issues related to executive pay- in this rousing speech. Here is an excerpt from that speech:

“Let me touch on a few of the comments that I found most interesting (although this is certainly not an exhaustive list):

Advisory Vote by Shareholders. A number of commenters have suggested that we require companies to put the compensation report to an advisory shareholder vote, or that we seek an amendment of exchange listing requirements to require such advisory votes. Alternatively, commenters have recommended that we codify a no-action position of the Staff that has allowed shareholders to include in proxies non-binding resolutions that ask for an advisory shareholder vote on the compensation report. As an aside, I’ll also note that Congressman Barney Frank has introduced a bill that would, among other things, require shareholder approval of compensation plans.

These are definitely intriguing suggestions, and, if adopted, no doubt would provide shareholders the clearest and most direct voice in executive remuneration. Apparently, the United Kingdom and Australia have an advisory vote requirement on the compensation report, and there appears to be some evidence that this may have some effect in curbing excessive executive pay. For example, one study in the United Kingdom found that executive pay is declining, and another article noted that the typical British CEO makes only a little more than half of what the typical U.S. CEO makes. In any event, having the shareholders cast an advisory vote on this subject would very likely improve transparency in this area, and for this reason alone, I think it is a topic worthy of additional discussion. Of course, requiring shareholder votes, even advisory ones, is not something that the Commission has done frequently, and so I think that we’ll need to look carefully at our powers in this regard.

Disclosure of Performance Targets. Another topic that comment letters touched upon is the fact that the proposal does not require the disclosure of specific quantitative or qualitative performance-related factors considered by the compensation committee or by the board in determining executive compensation. Apparently, the argument for not including such a requirement would be to avoid forcing companies to disclose confidential commercial or business information that would have an adverse effect on the company. This is certainly understandable.

On the other hand, without disclosure of these performance-related factors, it becomes difficult for shareholders to determine whether the targets are appropriate and whether executives have actually met the targets. Perhaps a middle alternative would be to require disclosure after the fact: that is, maybe it would be effective and appropriate to require companies to disclose the particular quantitative or qualitative performance-related factors after the time period for which the factors apply. Some commenters take the position that this would make the executive compensation process more transparent, yet alleviate concerns about disclosure of confidential information. However, companies might still be concerned that disclosure of specific targets even after the fact raises confidentiality issues that might ultimately harm the company. In any event, given the comment letters on the subject, this is an issue that we at the Commission should consider, and I intend to approach it with an open mind.

I could continue and recite at great length some of the insightful comments that have been submitted to us, but if I were to do so, I would surely eat up the time that has been set aside for questions. Rest assured that our Staff is carefully reviewing the comment letters right now, and all of us on the Commission will pay very close attention to the public’s suggestions on this topic.”

PCAOB Proposes Annual Reporting by Audit Firms

Last week, the PCAOB proposed rules that would require audit firms registered with the PCAOB to submit annual and special reports. These reports would be publicly available on the PCAOB’s website, subject to confidential treatment requests. You might recall that Section 102(d) of Sarbanes-Oxley provides that each registered audit firm must submit an annual report to the Board (and may also be required to report more frequently to provide information specified by the Board or the SEC).

The reporting framework proposed by the Board includes two types of reporting obligations. First, the proposal would require each registered firm to provide basic information once a year about the firm and the firm’s issuer-related practice over the most recent 12-month period. Second, the proposal identifies certain events that must be reported within 14 days.

The Board also proposed rules that, in certain circumstances, would allow a successor firm to succeed to the registration status of a predecessor firm following a merger or other change in the registered firm’s legal form. In other circumstances, the proposed rules would allow for temporary succession for a transitional period of up to 90 days while the firm seeks registration.

At first blush, the concept of an audit firm filing annual reports seemed odd to me. But these annual reports would not really be akin to a company‚Äôs glossy annual report nor would they contain clearly objectionable information (like a firm’s client list). Still, it will be interesting to read the comments on this one because auditors might have strong opinions here…