Monthly Archives: November 2006

November 13, 2006

Updating This Year’s D&O Questionnaire

There are so many new issues to consider whey you update this year’s D&O questionnaire, some of which you need to ponder and address beyond what is in the sample D&O questionnaire that we recently posted. Please send me your thoughts as you work your way through these new issues.

For instance, one member noted that one possible new item might be some sort of explanation of what constitutes a “pledge” of securities – or to even break down that question into subparts, such as: “How many shares do you hold in a brokerage margin account?” Let me know your reaction to this set of thoughts.

D&O Questionnaires: Director Independence

Below are combined thoughts from several members that recently emailed me about the challenges of capturing director relationships in a questionnaire: “I don’t think many independence questionnaires currently capture relationships like that between the UnitedHealth director Spears and the company’s CEO, Dr. McGuire. I think some re-thinking is a good idea as the UnitedHealth revelation highlights one of the weaknesses of the current focus on independence: the existing tests all deal with relationships between the director (or his family members or entities) and the company, rather than individual members of senior management. We all know intuitively that loyalty typically runs to people, not institutions. So not taking into account relationships with the CEO or other senior executives misses much of the true ‘relationship action.’

Maybe a solution is to add new items to the D&O questionnaire keyed off of – or cloned from – the ISS independence test (or the CII equivalent) that the D&O questionnaire reach transactions/ relationships between a director and management and putting these into a stand-alone independence questionnaire. Maybe they get couched in terms of ‘information the company may want in connection with institutional investor concerns’ or ‘…corporate governance rating/ proxy advisory service concerns.'”

D&O Questionnaires: Related-Party Disclosures

And here is a member reaction to Corp Fin Director John White’s recent speech on related-person disclosures: “The import of the excerpt from John White’s speech posted on your blog is pretty stunning. It seems as though companies will need to learn a whole lot about the circumstances surrounding all kinds of transactions in order to decide whether they have to be disclosed. Imagine what the questionnaire will look like now: ‘Did the company donate to a charitable organization that employed one of your family members, which was in dire financial straits before the donation was made?’ Yikes!”

November 9, 2006

The Big 4 Speak: Auditors Want to Change Their Liability Exposure and Client’s Reporting Model

At a symposium yesterday, the CEO’s of the six largest auditors issued a joint paper seeking input on a number of topics; foremost among them is reduced liability for auditor work and changes to how clients report results. There are some far-reaching ideas in the paper, including eliminating the quarterly-reporting framework and having clients conduct forensic audits on either a regular or “as needed” basis (eg. when shareholders vote to have such an audit conducted). The auditors’ CEOs published this opinion editorial, which summarizes their paper, in yesterday’s WSJ.

Options Backdating: The SEC’s Enforcement Perspective

A few weeks ago, the SEC’s Division of Enforcement Director Linda Chatman Thomsen delivered this speech on option backdating. [Speaking of SEC speeches, I am missing today’s PLI Securities Institute – first time I have missed that conference in quite a few years. We still will be posting some notes from the Conference next week.]

PCAOB Postpones Prohibition of Tax Services

A few weeks ago, the PCAOB postponed the implementation date of the prohibited tax services rulemaking, which now will allow audit firms to perform tax work for executives of the companies they audit for another six months.

As you might recall, the PCAOB adopted Rule 3523 in July 2005, but the SEC didn’t approve the rule until April 2006. The original implementation schedule allowed auditors to provide tax services that were “in process” when the SEC approved the rule, so long as the services were completed by October 31, 2006. Now, the revised implementation schedule allows these services to continue to be performed until April 2007. [And here is your reminder about updating your pre-approval of non-audit service policies.]

November 8, 2006

Should an SEC Chairman Leave Comments in the Blogosphere?

As widely reported, SEC Chairman Chris Cox posted a response to a letter from Sun Microsystem’s CEO Jonathan Schwartz by leaving a letter in the form of a “comment” on the CEO’s blog. As I blogged a few weeks ago, Sun’s CEO sent a letter – that he posted on his blog – to Cox requesting that the SEC recognize that blog postings were considered “widely disseminated” for Regulation FD purposes.

In his response, Chairman Cox applauds the use of corporate websites as “as a source of information to the market and investors” and is open to the idea of information posted on the Web as potentially being considered “widespread dissemination.” No real surprise here as the SEC has been soliciting comments in various rulemakings for this type of notion for years, even before Regulation FD was born! (eg. May 2000 interpretive release).

Even though Chairman Cox’s “comment” is in the form of a letter, I get a little uncomfortable with the idea that regulators might start leaving comments on blogs. How are we supposed to know that the comment is indeed from the SEC Chairman? Anyone can post a comment and claim they are Chris Cox simply by pushing a button. I think regulators should use more formal channels of communication, partly for their own sake so that they don’t get caught in a heap of bad publicity due to a prankster’s act of impersonation.

As an aside, the Chairman is getting criticism (eg. like this critic) for the content of his letter to the Sun CEO because he didn’t take a specific view. This criticism is unwarranted in my opinion, as I think careful study is necessary before the SEC assumes that we all read the Sun CEO’s blog on a regular basis; read some of the comments submitted on the e-Proxy proposal for conflicting views on the topic (some of which echo the thoughts near the end of this article about the use of established news channels to satisfy Regulation FD).

Disclosure Committees: The Latest Disclosures

In updating our “Sample Disclosures about Disclosure Committees”, we were surprised to see how much information that some companies – including one foreign private issuer we came across – were providing about their disclosure committees in their proxy statements this year. Here are a few of the examples we have posted:

Starwood Hotel’s Proxy Statement filed April 7, 2006: “The Company has a Disclosure Committee, comprised of certain senior executives, to design, establish and maintain the Company’s internal controls and other procedures with respect to the preparation of periodic reports filed with the SEC, earnings releases and other written information that the Company will disclose to the investment community (the “Disclosure Documents”). The Disclosure Committee evaluates the effectiveness of the Company’s disclosure controls and procedures on a regular basis and maintains written records of the disclosure controls and procedures followed in connection with the preparation of Disclosure Documents. The Company will continue to monitor developments in the law and stock exchange regulations and will adopt new procedures consistent with new legislation or regulations.

Harley-Davidson’s Proxy Statement filed March 30, 2006: “Q: Does the Company have a Disclosure Committee?

A: Yes. The Company has a Disclosure Committee comprised of members of management responsible for considering the materiality of information and making disclosure decisions on a timely basis. The Disclosure Committee Guidelines, as amended, provide, among other things, that the Disclosure Committee: (1) has access to all Company books, records, facilities and personnel, as well as the Company’s independent registered public accounting firm and outside counsel; (2) design, establish and maintain disclosure controls and procedures for the SEC reporting process and modify them from time to time, as appropriate; (3) create and review all financial press releases; (4) review SEC filings on Form 8-K, Form 10-K, Form 10-Q and the Company’s annual proxy statement; (5) suggest appropriate disclosures or opine on disclosure issues; (6) evaluate changes in SEC, New York Stock Exchange (“NYSE”) and Financial Accounting Standards Board disclosure rules and make recommendations regarding their impact on the Company; (7) receive and review regular updates from the Company’s management, internal auditors and independent accountants; (8) discuss material items with employees in the internal audit function, independent registered public accounting firm and the Company’s management to ensure appropriate disclosure; (9) arrange for necessary training to ensure effective implementation of the disclosure controls and procedures; (10) periodically review and reassess the performance of the Disclosure Committee; (11) maintain written records necessary to evidence procedures followed in connection with the preparation and approval of any disclosure documents; (12) annually review and reassess the adequacy of the Disclosure Committee Guidelines; and (13) undertake any other responsibilities delegated to it from time to time by any senior officer of the Company to assist that senior officer in fulfilling his or her responsibility for oversight of compliance with the disclosure controls and procedures. The Company formally established the Disclosure Committee in October 2002.

British Sky Broadcasting Form 20-F filed July 31, 2006: “The Company maintains disclosure controls, procedures and systems that are designed to ensure that information required to be disclosed in the reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarised and reported within the time periods specified in the SEC’s rules and forms, and the Company’s UK listing obligations. The Company has established a disclosure committee. The committee is chaired by the Company Secretary and its members consist of senior managers from group finance, legal and investor relations. It has responsibility for considering the materiality of information (including inside information) and on a timely basis, determination of the disclosure and treatment of such information. The committee also has responsibility for the filing of reports with the SEC and overseeing the process for the formal review of the contents of the Company’s Annual Report.”

Don’t forget to take our latest quick survey on disclosure committees!

November 7, 2006

Reminder: New Form 8-K Rules Effective Today!

Remember that any Form 8-Ks with triggering events that occur today – and afterwards – have to comply with the SEC’s new executive compensation rules. We have posted some memos regarding the changed 8-K rules in our “Form 8-K” Practice Area on both and The cover page of the Form 8-K remains the same…

Shareholder Access vs. Majority Voting Standards

Following up on my blog about the shareholder proposal regarding shareholder access recently submitted to Hewlett-Packard, Keith Bishop notes: “I think that it is interesting to compare the situation at Hewlett Packard to companies with majority vote proposals. At Hewlett-Packard’s 2006 annual meeting, its stockholders rejected a majority vote proposal. In opposing that proposal, Hewlett-Packard argued that ‘the plurality voting standard is compatible with HP’s cumulative voting provisions, which allow stockholders to aggregate their votes for a single director nominee, and therefore provide stockholders a meaningful ability to express their preferences in the election of directors.’

In companies like Hewlett Packard, however, cumulative voting is only a potentiality. The reason is the high cost of soliciting proxies. Cumulative voting is only meaningful when there is a contested election. Approval of a stockholder access proposal at Hewlett-Packard’s next meeting therefore could open the door to the actual (as opposed to potential) use of cumulative voting as a means to express stockholder preferences. Majority voting, in contrast, offers only a negative – the potential to cause someone not to be elected. Any vacancy that results from a majority vote rule is filled by appointment and not shareholder election.”

The Board’s Role in Compliance

In this podcast, Maggie Bavuso of Compliance Systems Legal Group provides some insight into how boards should monitor a company’s compliance function, including:

– What has changed board responsibilities relative to compliance programs
– What is the impact of the revised Federal sentencing guidelines on the board’s compliance obligations
– What are the oversight responsibilities that boards now have
– How should a board handle an H-P type of investigation

November 6, 2006

General Electric CEO Jeff Immelt on Internal Pay Equity and More

Here is a “must read” article and free video from Friday’s Financial Times: “Jeffrey Immelt, chairman and chief executive of General Electric, has urged company leaders in the US to ensure their pay does not dramatically outstrip that of their senior managers and to limit the influence of compensation consultants.

Mr. Immelt’s intervention in the debate over executive pay – featured in a video interview with the Financial Times – underlines the growing importance of the issue for shareholders and executives of America’s largest companies. “These are public jobs, there were so many abuses in the late 90s and in the early part of this century and that created concerns,” he said.

Mr. Immelt argued that chief executives should not have multi-year contracts, which could lead to large pay-offs if they were dismissed, and the bulk of their compensation should be linked to performance. Yesterday, the FT revealed that a group of leading public pension funds had urged the top 25 companies in the US, including GE, to ban pay consultants from advising the board and working on other company matters.

Mr. Immelt, who took over the leadership of the industrial conglomerate five years ago from Jack Welch, did not mention the letter but said the board should be the final judge of executive pay. “I think it should be based on the good judgment of the compensation committees, the board and the CEO,” he said. “I don’t think consultants should be involved.”

In a separate conversation with the FT, he said that, to motivate staff and avoid excesses, chief executives’ pay should remain within a small multiple of the pay of their 25 most senior managers. “The key relationship is the one between the CEO and the top 25 managers in the company because that is the key team. Should the CEO make five times, three times or twice what this group make? That is debatable, but 20 times is lunacy,” he said. Mr. Immelt, who last year received $3.2m in salary and no cash bonus, added that his pay was within the 2-3 times range.”

SEC Gains Another Deputy General Counsel

On Friday, the SEC announced that Alexander Cohen has agreed to leave Latham & Watkins’ Hong Kong Office (and Co-Chair of the firm’s Corporate Finance Practice Group) to serve as the agency’s Deputy General Counsel for Legal Policy and Administrative Practice. Alexander joins Andrew Vollmer, who is Deputy General Counsel for Litigation and Adjudication. Looks like SEC GC Brian Cartwright is “getting the band back together” by luring a colleague from his former firm…

What Do Tomorrow’s Elections Hold in Store for Sarbanes-Oxley Reform?

With President Bush and Vice President Cheney making comments about Sarbanes-Oxley reform during the past few weeks, it is evident that the debate over reform is reaching new levels. As described in detail in The D & O Diary, some of the issues to be tackled by the recently-formed Paulson Committee are truly far-reaching, such as the elimination of the use of Rule 10b-5 in private litigation!

This article from Saturday’s WSJ gives us an idea what Congressman Barney Frank (who is the ranking Democrat on the House Financial Services Committee and slated to chair that committee if the Democrats win the House on Tuesday). In the article, Rep. Frank “says he has no intention of reopening the landmark Sarbanes-Oxley corporate-accountability law, but would be willing to let regulatory agencies adjust their rules in light of business criticism that the law is being applied too stringently.”

And there has been plenty of other “reform/no-reform” rhetoric lately, such as this recent op-ed in the WSJ by Senator Charles Schumer and NYC Mayor Michael Bloomberg about American competitiveness and regulatory burden; Senator Schumer and Mayor Bloomberg noted four themes that have emerged so far from a study they commissioned from McKinsey & Company. Some of the themes echo those coming from others, including the Paulson Committee.

Personal note: With the page scandal festering as a campaign issue, I am compelled to note that I served as an intern on the Hill when I was in high school in the ’70s (I moved from Chicago to Bethesda in 10th grade). Complete with long hair, braces and platform shoes – and no untoward experiences. I was among the last of the interns as the program was soon abolished, leaving the pages as the sole body of underage staffers.

The experience was grand; I worked for the late Paul Simon from southern Illinois, who was in the House at the time before he became a Senator. Talk about an ethical guy; he was the epitome of what every politician should aspire to be…

November 3, 2006

Posted: CD&A Template and Checklist

A few weeks ago, I blogged about Jesse Brill’s warning to be wary of CD&A mock-ups that were not up to snuff. We have just posted a “CD&A Template and Checklist” by ExeQuity that begins to address the kind of analysis that will be necessary. It is posted in the “CD&A” Practice Area on

We are hoping to see more examples that actually show, for example, that the compensation committee has utilized the key tools that are now expected to be used as part of the board’s analysis and decision-making — and then provide the assessment of the results and the basis for the decisions that followed. We encourage our members to re-read the “CD&A Pointers” provided in the September-October issue of the The Corporate Counsel – as well as the points made about the CD&A in the Special Supplement to that September-October issue.

CEOs and Country Club Memberships

Yesterday, USA Today ran this article that shows that some CEOs belong to three, four and five country clubs at once. It will be interesting to see how the USA Today research compares against what is disclosed in next year’s proxy statements.

Country club memberships can pose interesting disclosure challenges, ranging from whether it is even a perk (depending on how its used and by whom) to how to value the membership when it is considered a perk. Our ongoing “Perk Survey” poses some questions about these topics.

Sidenote: I have a quote in the article about the practice of companies paying taxes for these memberships and how that is “radioactive”; this quote is out of context as my real intent was that I believe that gross-ups are foremost on shareholder’s minds when it comes to abusive pay practices. This MarketWatch quote on a different topic is more on the money…

Available: Adopting Release for Best Price Rule Amendments

Yesterday, the SEC posted the adopting release for its best price rule amendments. They will become effective 30 days after publication in the Federal Register.

November E-Minders is Up!

The November issue of our monthly email newsletter is now available.

November 2, 2006

Canada Enacts a New Tax on Popular Income Trusts

Yesterday’s NY Times article about a new Canadian tax starts with this excerpt, “In a move that surprised Canada’s stock markets, the Canadian government announced late Tuesday that it would tax income trusts. Companies with market values totaling about 70 billion Canadian dollars have changed from conventional stock structures to trusts this year. Once transformed, companies largely avoid corporate taxes by paying out most of their profits directly to shareholders. About 200 billion Canadian dollars held in Canadian markets are now invested in trusts. While the large, regular cash payments have made trusts popular with investors, the trend has come in for considerable criticism.

My first reaction was to wonder: “what will happen to income deposit securities?” Jeffrey Singer, an income fund expert with Stikeman Elliott LLP in Toronto addressed my concern: “IDS and similar “income security” issuers may be one of the few lights shining through the otherwise dark shadow cast by the Canadian federal government’s proposal to tax income funds. Based on available details, the current proposal would not seem to effect IDS structures. In fact, many are considering whether the structure ought to be applied to domestic issuers in much the same manner as it had heretofore been applied to northbound cross-border issuers. However, the likelihood of such a market emerging in the short term and without prior rulings from Finance is unlikely, given the strong contrarian bias of the federal government towards flow-through entity structures expressed, and the overt statement in its background paper that ‘if there should emerge structures or transactions that are clearly devised to frustrate those policy objectives, any aspect of these measures may be changed accordingly and with immediate effect.’ Ironically, this move by the Federal Government ostensibly taken in the best interests of Canada and its economy may have created some significant opportunistic acquisition targets for, among others, foreign and primarily US-based acquirers.”

We have posted other analyses of this new law from several bankers in our “Income Deposit Securities” Practice Area.

RiskMetrics Group Acquires ISS

Yesterday, RiskMetrics Group, a financial risk management firm, announced it has acquired Institutional Shareholder Services, the largest proxy advisor. According to the press release, the merger reflects the broader vision of both companies to expand beyond their core businesses of financial risk management and corporate governance to offer a broad range of data, analytics and advice to investors. Here is an article about the deal from today’s Washington Post.

What’s Next for Boards? Ten Landscape-Altering Trends

Here is a list of ten board trends from John Wilcox, SVP and Head of Corporate Governance of TIAA-CREF, from this recent article in the Directors & Boards e-Briefing:

1. Majority voting and the right of shareholders to vote against directors will become the norm, replacing the plurality vote standard in U.S. director elections.

2. Executive compensation will be brought into line by a combination of factors: enhanced SEC disclosure requirements, an advisory shareholder vote on compensation committee reports, and recognition of the need for internal pay equity.

3. Separating the roles of chairman and CEO will become more common at U.S. companies, encouraging boards to worry less about preserving power and more about developing and incentivizing the best executive talent.

4. The model of the imperial, celebrity CEO will be replaced by the stewardship model, with Reginald Jones unseating Jack Welch as the role model.

5. Sustainability and corporate social responsibility, formerly relegated to gadflies and special interest groups, will be recognized as key corporate governance responsibilities for which directors should be held accountable.

6. Shareholder communications and proxy voting systems will be revamped by the SEC to make better use of technology, reduce costs, increase efficiency, and improve a board’s ability to identify and communicate with shareholders.

7. Shareholder resolutions will be overtaken by other forms of constructive engagement, and shareholder activism will become less confrontational, more responsible–and more effective.

8. The definition of beneficial ownership will become more complicated and problematic as stock lending and derivative investment strategies enable investors to separate voting rights from any economic interest in the underlying stock.

9. The spotlight will shift from the governance of companies to the governance of institutional investors, with a focus on how institutions should best fulfill their conflicting duties to maximize returns while acting as responsible owners.

10. Companies will come to recognize that corporate governance is not just a matter of regulatory compliance and accountability but a strategic means to lower the cost of capital, reduce risk, create value, and strengthen the long-term performance of the corporate enterprise.

November 1, 2006

Another Sample Related Party Transaction Policy

In our “Related Party Transaction” Practice Area, we have posted another sample policy with respect to related-person transactions. As you probably know, newly amended Item 404(b) of Regulation S-K requires companies to disclose their “policies and procedures for the review, approval, or ratification” of any related person transaction requiring disclosure under Section 404(a) of Regulation S-K – and Item 404(b) provides that the disclosure of the material features of such policies may include a statement as to “whether such policies and procedures are in writing and, if not, how such policies and procedures are evidenced.”

In addition, companies must identify any related person transactions reported under Item 404(a) that did not require review, approval or ratification under the policies and procedures or where such policies and procedures were not followed. So everyone should be busy creating such policies (and updating them if they already have them…

Shareholders: Interested in Director Election Results This Proxy Season

Clearly, investors will be watching director election results this proxy season more closely than ever with shareholder access “back on the table” and the majority vote movement going strong. Keith Bishop notes: Back in August, the Delaware Chancery Court addressed – in Accipiter Life Sciences v. Helfer – whether a company inequitably manipulated the election machinery by including the announcement of its annual meeting in press release largely devoted to financial results.

The primary reason why this opinion is interesting is because the plaintiffs apparently thought that they had enough of a shot at winning to file the lawsuit. In this case, a shareholder admitted that two of its employees actually read the press release, but somehow skipped the “hidden” paragraph announcing the annual meeting. Under the company’s advance notice bylaws, the plaintiff had ten days from the announcement to submit nominations. The plaintiff failed to meet the deadline and filed suit. The Delaware Chancery Court ruled for the defendants finding that nothing in the actual language, the placement of the disclosure in the press release, or the absence of headings obscured the disclosure so as to escape all notice.

The Art of Boardroom Etiquette and Confidentiality

Tomorrow, join us for the webcast – “The Art of Boardroom Etiquette and Confidentiality” – as Professor Charles Elson; Diane Frankle of DLA Piper; Carl Metzger of Goodwin Procter; and Richard Truesdell of Davis Polk discuss a myriad of legal issues (corporate, securities, privacy and listing standards) as well as sound governance practices in the context of boardroom leaks (both before and after a leak occurs).