TheCorporateCounsel.net

Last week, the SEC Staff (OCA, Corp Fin and IM) issued long-awaited guidance – in the form of SAB 108 – on how errors, built up over time in the balance sheet, should be considered from a materiality perspective and corrected. SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement.

As stated in this press release, there have been two common approaches used to quantify such errors. Under one approach, the error is quantified as the amount by which the current year income statement is misstated. The other approach quantifies the error as the cumulative amount by which the current year balance sheet is misstated. The SEC Staff believes that companies should quantify errors using both a balance sheet and an income statement approach – and evaluate whether either of these approaches results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material.

SAB 108 also describes the circumstances where it would be appropriate for a registrant to record a one-time cumulative effect adjustment to correct errors existing in prior years that previously had been considered immaterial as well as the required disclosures to investors. There is no real “effective date” of SAB 108 since they represent the SEC Staff’s views of the proper interpretation of existing rules, but November 15, 2006 is a reference point as noted in SAB 108. For more analysis of SAB 108, see the AAO Weblog.

CalPERS Calls for Hearing on Shareholder Access

To better understand the significance – and the consequences – of the AFSCME case, I am in the process of finalizing the panel for a webcast – “Shareholder Access and By-Law Amendments: What to Expect Now” – which will be held about a month after the SEC’s open Commission meeting to propose amendments to Rule 14a-8.

Here is some information from “CorpGov.net“: “In response to the AFSCME court victory on shareholder access and the subsequent announcement by the SEC to hold a public hearing on 10/18/06, CalPERS’ Board President, Rob Feckner sent a letter urging the SEC to fully consider investor views about access to the proxy to nominate corporate directors.

I understand that a Commission meeting has been scheduled to discuss a recommendation by the Division of Corporation Finance to amend Rule 14a-8 in response to the AFSCME litigation. Instead of simply responding to this litigation by adopting a stopgap rule, CalPERS asks that the Commission give the proxy access issue its full consideration.”

“The SEC-Saw”

From Friday’s WSJ, here is an editorial on shareholder access from Ira Millstein and Harvey Goldschmid:

“Shareholder access is officially back on the agenda at the SEC, forced there by a recent court decision. And this time around the SEC should seize the opportunity to craft a solution that opens up the proxy to shareholders in a sensible way, a solution that ensures board accountability to shareholders.

The decision last week by the Court of Appeals for the Second Circuit paved the way for shareholders to propose bylaw amendments allowing shareholders to nominate directors and for those nominations to be included on the company’s proxy. The decision turned on the court’s analysis of an SEC rule allowing exclusion of any proposal that “relates to an election” and the various interpretations given to that rule by the SEC over the years. The SEC has since announced that it will develop a proposed amendment to that rule and will hold an open meeting on Oct. 18, 2006, to consider the proposal.

This isn’t the first time the SEC has considered this issue. Most recently, in October 2003, it proposed new rules for shareholder access to company proxy material. Those rules were designed to shift the balance of power between corporate managements and shareholders, by giving dissatisfied majorities of shareholders a meaningful role in the election process without the need to embark on an expensive proxy contest. Under the process then and now in effect, there are virtually no contested elections for the boards of large public corporations in the U.S. The analogy is to elections in the Soviet Union.

The SEC’s proposed rules in 2003 generated an enormous amount of vigorous debate. It even led indirectly to reform in the area of majority voting through the urgings of institutional investors and governance thought-leaders. But the proposed rules themselves never progressed to “final.” This occurred for a variety of reasons, including concerns about complexity and potential for abuse by obstructionists, to pure management self-interest in ensuring that director elections remained under company lock and key.

The October 2003 proposed rules may have stalled, but the reasons they were proposed in the first place are all around us still. Shareholders are still the providers of capital in our economy. They are still responsible for electing directors who will improve performance. And they still lack a meaningful avenue of bringing about mid-course corrections when management is ineffective or wrongheaded and the board is compliant. They still need an avenue to making themselves felt.

The court’s decision has opened the door for the SEC to think again about shareholder access and its importance for corporate efficiency, honesty, productivity and profitability. The SEC should strive for a solution that gives shareholders a voice in the director election process. Its recommendation should include safeguards such as minimum holding requirements that may be necessary to ensure that access opportunities are not abused by shareholders with non-efficiency or obstructionist motivations. A uniform approach to shareholder access is key to achieving a balanced result and avoiding the confusion and delay that can reign when ad hoc development by too many cooks is permitted to occur (as with majority voting reform, for example).

We urge the SEC to balance the system and give shareholders the tools to hold boards accountable — and, in the process, restore public confidence in the fairness and economic rationality of the governance system.”