January 17, 2007

Corp Fin’s Option Backdating Guidance

Yesterday, Corp Fin’s Chief Accountant’s office posted guidance – in the form of a sample letter (ignore the header about oil & gas companies; that is a SEC webmaster snafu) – regarding restatements and option backdating. A little nerve-wracking that the Staff gives a lot of helpful guidance – but then adds the qualifier that even if you follow it, it doesn’t mean you can conclude you are current. So I imagine the Staff will continue to get a lot of calls from folks with backdating issues.

This Staff guidance was anticipated in the Nov-Dec 2006 issue of The Corporate Counsel, which was mailed last week – and will be dealt with more in the upcoming Jan-Feb issue which will be mailed by the end of the month. By the way, that Nov-Dec issue has a great – and lengthy – analysis of how to implement the SEC’s new related person rules.

The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!

Catch tomorrow’s blockbuster 3-hour webcast – “The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!” – to hear the SEC’s Paula Dubberly, Mark Borges, Ron Mueller and Alan Dye discuss how companies are gearing up to provide their new executive compensation and related party transaction disclosures this proxy season.

Because this essential 2-Part Web Conference will be accessible only to those that are 2007 members of (Part I on the SEC’s December rule changes was last week, audio archive now available), we urge those of you who have not yet renewed for 2007 to do so now (all memberships expired at year end; grace period for non-renewers has ended) – and anyone not a member should try a no-risk trial. If you need to renew, please renew online if you can as our HQ is overwhelmed right now.

Senate Panel May Limit Tax-Deferred Pay to $1 Million

According to this Bloomberg article, the Senate Finance Committee may consider a proposal setting a $1 million limit on the amount of compensation highly paid workers such as corporate executives, professional athletes and entertainers can defer tax-free each year. The provision was included in a preliminary draft of legislation that was posted yesterday (but then removed because it had been posted “prematurely”).

Rep. Barney Frank: CEO Pay Bill Vote By Mid-’07

Rep. Barney Frank, the new Chair of the House Financial Services Committee, continues to be outspoken on executive pay as he works towards resurrecting his Truth-in-Pay bill. On Thursday, Rep. Frank said he hopes to pass a bill by mid-2007 to give shareholders more say in setting corporate executive pay, according to this Reuters article.

Rep. Barney Frank: Speaking Frankly

Below is an excerpt from comments made by Rep. Frank at the National Press Club on January 3rd:

MODERATOR: You’ve said that you would support giving shareholders more power to constrain executive pay.

Will you provide some details, please, on how you would do this?

FRANK: We’re still working out the details. But, yes — I have to say, boards of directors, I didn’t know much about them before I got to be the senior member of our committee.

You read about boards — they’re supposed to be — I read about boards of directors in Enron and MCI and elsewhere, and they reminded me, I guess this is an appropriate journalistic forum to use this metaphor, the role of the boards of directors in all these crises remind me of something Murray Kempton once said, the great journalist from the New York Post, talking about editorial writers. He said the function of editorial writers is to come down from the hills after the battle is over and shoot the wounded.


And it seemed to me that’s what the boards of directors used to do.

Now, some of them have gotten more energetic, and I think Sarbanes-Oxley has helped them do that.

But there’s one area where the boards of directors do not appear to be much of a check, and it’s easy to understand why, because they don’t stand up to the CEO. They may stand up to the workers. People said, “Well, do you want to cut the bargaining agreements or the wages to go to shareholders?” You can count on the board of directors to want to depress what they pay the workers.

FRANK: But with regard to the CEO, in the first place, the CEO picked the board of directors; they picked the CEO. It’s a very collusive relationship.

And it’s clear that boards of directors do not provide any real check on CEOs. And it’s true, I guess, the board of directors of Home Depot finally decided that Mr. Nardelli had to go. And they put their foot down and gave him $210 million and asked him to please leave, at which point he apparently succeeded, for the first time, in raising the stock price, by leaving. But $210 million is an expensive thing for that.

So I plan to have some legislation by which we increase the ability of shareholders to vote. And we’re going to try to work out the details, including what happens if they were to vote no.

They have that in Britain, by the way. And Britain has become, recently, an example. And a lot of American corporate leaders have said, well, we like what they have in Britain. We think the Financial Services Authority is more flexible than the Securities and Exchange Commission, that Britain does it better.

But in Britain, shareholders have much more say. And particularly here, I do not think you can count on boards of directors to be adequate checks.

By the way, this compensation for CEOs — it’s not just a matter of envy. It has reached a point where it has some macroeconomic significance.

People at Harvard, Lucian Bebchuk and others, have shown the percentage of the profit of these top 1,500 corporations that goes to compensation for the top three officials has reached almost 10 percent. We’re talking, now, about significant numbers. When Lee Raymond gets $400 million when he leaves ExxonMobil, and the pension is shorted, the pension fund, we’re not just talking about envy.

So yes, we are going to be working on this, and when it gets to committee, we’ll be dealing with it. The SEC — I have one small difference with what they did, but the SEC has made some real gains in requiring corporations to be more open about what kind of compensations there are. And that’s all compensation. It’s stock options, and it’s retirement, and what happens if there’s a change in the corporation.

And by the way, one of the things that we don’t do enough of in this business of ours and yours is to talk about the predictions of doom that didn’t happen. We’re often beating our breast because something bad happened, and we didn’t predict it. What about all the bad things that we predicted that didn’t happen?

Two that come to mind, to me, are same-sex marriage in Massachusetts and expensing stock options. In both cases, enormous negative consequences were predicted and, of course, none have materialized.

I do think it’s time to have a hearing. When we voted on preventing the accounting officials from requiring that stock options be expensed, we heard terrible predictions about the negative effects this would have on the valuation, particularly, of technology companies. It has not happened.

FRANK: And I got to say — and I voted against that bill. So yes, I am saying I told you so.

One of the most common lies in human existence is when people say, “Oh, I don’t like to say ‘I told you so.'”

I do not know anyone who doesn’t like to say “I told you so.”


And I have personally found that as one of the few pleasures that improves with age.


I can say I told you so and enjoy it without taking a pill before, during or after the operation.

And we told them so about this. So I think that — again, there’s a lot less fragility in this economy than people think.

But, yes, we have got to find some way to give shareholders — maybe it’s automatic or maybe it’s whatever shareholders want to — but shareholders have to be the check.

By the way, the shareholders we’re talking about now — we’re not talking about this or that individual somewhere off in the country. You’re talking about a very sophisticated set of institutional investors. You’re talking about CalPERS. You’re talking about other pension funds run by public officials or by unions.

There are entities out there representing groups of shareholders who are sophisticated and thoughtful, and I believe corporations would benefit greatly by their increased participation.