Monthly Archives: January 2012

January 31, 2012

Mine Safety Tweaks to Forms 10-K and 10-Q Effective

As noted in Gibson Dunn’s new “Securities Regulation & Corporate Governance Monitor,” the changes to Forms 10-K and 10-Q caused by the new mine safety rules took effect on Friday. The headings for Part I, Item 4 of Form 10-K and Part II, Item 4 of Form 10-Q now read “Mine Safety Disclosures” (previously those headings were the more distinguished “Removed and Reserved”).

As noted in Gibson Dunn’s blog, the SEC estimated that only approximately 100 companies would be subject to the new rules – but all other companies still should make this caption change and then can state that the item is “not applicable.” Note that the blank Form 10-K and Form 10-Q posted on the SEC’s site have not yet been updated…

ISS Issues 20 FAQs on Its ’12 Compensation Policies

Last week, ISS issued this set of FAQs about its newly-minted compensation policies; 15 about pay-for-performance, 3 about management say-on-pay responsiveness and 2 about equity plans.

Transcript: “Pat McGurn’s Forecast for 2012 Proxy Season: Wild and Woolly”

We have posted the transcript for our recent webcast: “Pat McGurn’s Forecast for 2012 Proxy Season: Wild and Woolly.”

– Broc Romanek

January 30, 2012

Off & Running: 1st Say-on-Pay Failure of the Year

As noted in its Form 8-K, Actuant is the first company holding its annual meeting in 2012 to fail to gain majority support for its say-on-pay with only 46% voting in favor. A list of the Form 8-Ks filed by the “failed” companies is posted in’s “Say-on-Pay” Practice Area.

Thanks to Professor Previts, I have posted a nifty series of pie charts that illustrate the rise of the institutional investor over time in our “Institutional Investors” Practice Area. Interesting stuff…

More on “Federal Court Dismisses Umpqua Say-on-Pay Lawsuit”

Quite a few members emailed me in response to my recent blog in which I reported news from Wachtell Lipton that a federal court had dismissed one of the say-on-pay lawsuits. As noted in this Reuters article, it’s simply a procedural skirmish at this point as the case was dismissed without prejudice. As noted in the article, the plaintiff’s lawyers intend to continue the case.

Transcript: “The ‘Former’ Corp Fin Staff Speaks”

We have posted the transcript for our recent webcast: “The ‘Former’ Corp Fin Staff Speaks.”

– Broc Romanek

January 27, 2012

The Furor over Income Inequality: Directors Need to Look In the Mirror

In the wake of President Obama’s State of the Union address, the front-page headline in the Washington Post screamed “Obama: Nation Must Address Inequality.” Some claim that the President is playing a class warfare card ahead of the November elections and maybe he is. But that is because he can. Not only is it abundantly clear that the vast majority of those in this country – and around the world for that matter, remember Britain’s actions just this week – are angry about increasing pay disparity, but quite a few experts believe our country’s ability to continue to be a high achiever is at risk because the rich are getting richer at the expense of the middle class. So even more than it was for the last Presidential election, excessive CEO pay will be a lightning rod once a GOP nominee is found and we head into the general election.

So what does this mean for advisors that help set CEO pay? It means a lot because the governance reforms of the past few years have changed only a few practices at the margins – but the bulk of the procedural deficiencies that led to an unsightly climb in pay over the past two decades remain. As I’ve said many times, boards need to get over their heavy reliance on peer group surveys since they are well known to be unreliable given that most boards sought to pay their CEOs in the top quartile for many years – thus tainting the database with a slippery slope upwards. How can boards continue to use these as a crutch when the plaintiff’s bar can so easily prove that the data is unreliable – and thus directors arguably didn’t fulfill a fiduciary duty because they knew they weren’t fully informed by not considering alternatives?

There are still too many cases of underachieving CEOs earning a lifetime’s worth of money in a single year. Sometimes they are fired before a year of service is even over – yet they walk off with a more than generous severance package. And this is not just a handful of outliers – this is the norm. It is far past time to do something about it.

An Alternative to Peer Group Benchmarking? Internal Pay Equity

Recently, a group of trade associations jointly sent this letter to the SEC regarding the need for further research before implementing Section 953(b) of Dodd-Frank, the pay ratio provision. The SEC Staff repeatedly has noted that Dodd-Frank grants the SEC fairly narrow latitude to veer from what Section 953(b) dictates, so I’m not sure how successful this letter will be. And I am well aware of the technical issues – and potential burdensome costs – of how the provision was written by Congress.

But how are boards (and their advisors and trade associations) embracing the spirit of this law? We’ve been touting internal pay equity as an untainted alternative to peer group benchmarking for the better part of a decade. We’ve told the story about how American capitalist J.P. Morgan is reputed to have had a rule that he would not invest in a company whose CEO was paid more than 50% above the executives at the next level. He reasoned that, if the CEO was paid more, he wouldn’t have a team but only courtiers. Internal pay is a primary factor when a company determines how to pay its workforce – why shouldn’t that principle apply to how CEOs get paid?

It’s shocking to me how few companies employ internal pay equity today. It’s use by DuPont, Whole Foods and a handful of others is no secret. And Dodd-Frank’s mandate for disclosure is well known. Shouldn’t boards demand to see what those ratios look like ahead of the mandated disclosure? And even more important, as noted above, shouldn’t boards demand to see those ratios to protect themselves from liability given the known bad data in the peer group surveys they get year after year? Of course, advisors should be willingly recommending the use of this alternative since it’s their job to protect the board. Sadly, most advisors blindly adhere to the status quo as too often happens.

I just can’t see what is wrong with putting together internal pay numbers for a board to consider. Where is the evil here? I suppose the downside is it likely will reveal how badly the board has been doing its job setting CEO pay levels over the past 20 years when historical numbers are crunched. But it’s better to make a fix now than perpetuate the problem. Note that I am not saying boards need to demand the ratios as called for by Section 952(b) as simpler ratios are easy to generate. We have sample spreadsheets posted in the “Internal Pay Equity” Practice Area on

By the way, I also don’t see any problem with using peer group benchmarks either. It’s just that the data in those surveys now are useless due to “pay in the top quartile” craze. There needs to be a reset before that type of data can be relied upon again. This reset will be hard to do, but it’s necessary and certainly doable, particularly if CEO pay levels are brought down to Earth on a widespread basis. The longer boards wait, the harder the medicine will be to take. See Exhibit A: Congress trying to force it upon boards through a misguided formulation of Section 953(b) of Dodd-Frank. If boards hadn’t waited so long to consider internal pay equity, Congress probably wouldn’t have felt compelled to act…

Why It’s Wrong to Compare CEO Compensation to Athlete’s & Actor’s Pay

With the periodic news of a sports star or big-name actor making $20 million per year, I am constantly called upon to remind someone that this is apples and oranges compared to setting CEO pay. For companies that choose to spend that kind of money on a sports star or actor, the decision typically is made via the processes used for any other large asset like a factory (the exception being sports owners who run their teams as a hobby). These processes include a comprehensive evaluation of what the return will be on that investment.

Compare that process to how a board makes the decision about how much to pay a CEO. On the surface, it may seem similar – but in substance, it is vastly different. For starters, the people making the decision are different. But even more important are the differences in the processes – and just as importantly, the end goals of those processes.

Nell Minow makes this point well in this ABC News article from a few years back entitled “Are CEOs and Celebrities Worth the Big Bucks?.” And here are more thoughts from Nell:

It’s a very small group in the stratosphere of pay: rock stars, movie stars, athletes, investment bankers, and CEOs. Of that group, the first four are in the ultimate pay-for-performance category, with a tiny percentage at the very top making millions of dollars, and with deals that evaporate quickly if a movie, a CD, or a business deal tanks. Their pay is set through tough arms-length negotiations.

CEOs are the only ones who pick the people who set their pay, indeed they pay the people who set their pay. And no matter what “independence” standard we try to impose, the board room culture of congeniality and consensus is so powerful that it makes it very hard to object, especially when the compensation consultant helpfully provides an avalanche of numbers designed to justify pay increases. In the wonderful world of CEOs, like the children in Lake Wobegon, everyone is above average. Even Warren Buffett acknowledges his own failings as a director, particularly in approving excessive compensation: “Too often, collegiality trumped independence.” If Warren Buffett, always a significant shareholder in any company on whose board he serves, does not feel able to oppose excessive pay, something is wrong.

– Broc Romanek

January 26, 2012

Broker Nonvotes: NYSE Deems Group of Governance Proposals to Be “Non-Routine”

Over the last few days, the NYSE has sent a notice to listed companies that brokers can no longer vote uninstructed shares on proposals that relate to a group of corporate governance matters – because the environment for the use of broker nonvotes has changed. The examples provided in the notice include: proposals to de-stagger the board of directors, majority voting in the election of directors, eliminating supermajority voting requirements, providing for the use of consents, providing rights to call a special meeting, and certain types of anti-takeover provision overrides (it seems likely that this new position applies to just these proposals – but the notice is unclear since it lists these as “examples”). The NYSE’s new position is effective immediately.

Here are some thoughts culled from this O’Melveny & Myers memo:

One practical implication of the NYSE’s new position is that companies may face increased difficulty in obtaining the necessary support for these governance proposals. This could especially impact companies seeking support for proposals requiring approval of a majority (or greater) of the shares outstanding, such as proposals seeking to amend the certificate of incorporation to implement a specified corporate governance change (for example, board declassification or the right of shareholders to act by written consent).

On these proposals, the resulting broker non-votes will have the effect of votes against the proposal. Companies seeking support for proposals that are subject to a typical default vote standard (such as the default Delaware standard of a majority of the shares represented and entitled to vote on the matter or a majority of the votes cast standard) may also feel an impact from this change because brokers who historically voted uninstructed shares in accordance with management’s recommendation (whether on an absolute or proportional basis) will no longer be permitted to exercise discretion to vote uninstructed shares in favor of these proposals. The impact will be more severe for companies with governing documents (or subject to state laws) requiring supermajority approval for revisions of the specified governance provision in their certificate of incorporation or bylaws.

Another Variation on Proxy Access

As noted in the ISS Blog: “The Furlong Fund, which has launched a proxy fight at a micro-cap firm, plans to put a proxy access proposal on the ballot. The fund, which is managed by financial analyst Daniel Rudewicz, is calling for investors to own at least a 15 percent stake for one month to be eligible to nominate candidates for up to one third of the board.

The company is Microwave Filter Co., which has a $2.3 million market cap. The Furlong Fund announced its plans in a filing and press release on Friday. The fund is seeking two seats on the company’s nine-member board.

The binding proposal is 17th access resolution that has been announced by investors for the 2012 proxy season, according to ISS data. The proposal, which has the highest ownership threshold but the shortest holding period of any resolutions so far, is the fifth “private ordering” variation on proxy access in 2012.”

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– How to Conduct Board Self-Assessments
– Study: Superior Financial Performance If Promote From Within
– Disclosure Overload & Complexity: Hidden in Plain Sight
– The Future of the SEC’s “Neither Admit Nor Deny” Enforcement Policy
– Delaware Supreme Court: H-P’s Privileged Report Can Stay Private

– Broc Romanek

January 25, 2012

UK Looks to Dramatically Overhaul Executive Pay: Binding Say-on-Pay for Starters

As I’ve blogged before, the United Kingdom has been on a path to revise its executive compensation laws to rein in excessive pay. Yesterday, the UK announced a slew of proposals that would push the envelope in the executive pay area – here are the proposals (or the closest thing I could find to them), as well as British Business Secretary Vince Cable’s oral statement, a summary of responses to the related discussion paper and a comparison with the High Pay Commission’s report that came out a few months ago (note that the HPC is not an independent commission; it’s a left wing charity). And here is a Towers Watson memo, ISS blog and NY Times article discussing these proposals.

The proposed major changes include:

– Say-on-pay votes would be binding
– Approval threshold increased to 75% from 50%
– At least two compensation committee members would have no prior board experience
– Clawbacks of bonuses if executives failed
– Enhanced disclosures

It’s notable that Britain’s opposition party is quoted in media reports as criticizing these proposals as not going far enough! Is this looking at tea leaves for the US? Remember Australia’s new “two strikes” law

New Shareholder Initiative Seeking Disclosure of Lobbying

Here’s something that I blogged last week on our “Proxy Season Blog“: As reflected in this press release issued yesterday, AFSCME has filed 40 shareholder proposals urging companies to report on lobbying expenditures, including indirect funding of lobbying through trade associations. This is an extension of the activist movement in the political contribution transparency area that is the hottest governance topic this proxy season – but instead of seeking information about how a company may be involved in influencing elections, these proposals seek transparency about how companies seek to influence regulation and laws.

The press release includes a sample of AFSCME’s shareholder proposal and supporting sample at the end, as well as a list of the companies that have received the proposal so far.

Proposed Legislation: Disclosure of Corporate Political Contributions

As Pat McGurn noted during yesterday’s proxy season webcast (audio archive available), political contributions is the hottest topic of this season. Not only shareholders are interested in this topic, but politicians as well (see Keith Bishop’s blog about a new bill that would mandate corporate political disclosures). With so many members asking questions about how their companies need to rethink their political contribution policies and procedures so they don’t violate pay-to-play or other laws or run afoul of what their major shareholders demand from them, I just scheduled a webcast – “The Exploding World of Political Contributions” – that will be held in two weeks.

Webcast: “Alan Dye on the Latest Section 16 Developments”

Tune in tomorrow for the webcast – “Alan Dye on the Latest Section 16 Developments” – to hear Alan Dye of and Hogan Lovells discuss the most recent updates on Section 16, including new SEC Staff interpretations and Section 16(b) litigation. Try a no-risk trial to catch this program.

– Broc Romanek

January 24, 2012

Using QR Codes for Shareholder Communications

In this podcast, Joe Lindfeldt of DG3 Group discusses how QR codes can be leveraged for shareholder communications, including:

– What are QR codes?
– How hard are they to generate?
– How can companies use them for shareholder communications?
– Can you give examples of how they have been used so far?
– What do you see as a likely future for QR codes?

Nasdaq Proposes Updated Initial Listing Standard

Last week, the SEC published notice of a proposed rule change by Nasdaq. The exchange is seeking to adopt a $2 or $3 initial listing bid price as an alternative to the current $4 initial listing bid price on its Nasdaq Capital Market. The change would allow the Nasdaq Capital Market to compete for listings with NYSE Amex, the only other exchange that currently has a $2 or $3 initial listing bid price. Hat tip to Vanessa Schoenthaler for her blog on this…

Transcript: “The Latest Developments: Your Upcoming Proxy Disclosures-What You Need to Do Now!”

We have posted the transcript for the webcast: “The Latest Developments: Your Upcoming Proxy Disclosures-What You Need to Do Now!”

– Broc Romanek

January 23, 2012

Corp Fin Updates Financial Reporting Manual (Again)

Last week, Corp Fin indicated that it has updated its Financial Reporting Manual for issues related to reporting requirements of an acquired business in a step acquisition, disclosures of subsidiary guarantee release provisions, auditor location issues, ICFR audit report modifications due to a scope limitation, revisions pursuant to effective dates of the Foreign Issuer Reporting Enhancements release, as well as other changes.

Corp Fin has posted a confusing “summary of changes” that comprise the current update because the opening few sentences make reference to the last update – but the chart on the “summary of changes” page is new. Last revised in October, Corp Fin has been updating the Manual much more frequently than in the past, deciding to do so a little bit at a time rather than major rewrites.

Last week, the NYSE reminded its staff in this memo that Super Bowl pools are strictly prohibited…

Carlyle Group Seeks to Prevent Shareholder Claims from Reaching a Courtroom

Those interested in preserving shareholder rights have been emailing me with complaints about the most recent amendment to Carlyle Group’s Form S-1 (under which the company hopes to go public by selling limited partnership units). As Kevin LaCroix explains in his “D&O Diary Blog,” the company specifies in its partnership agreement that all limited partners must submit any claims to binding arbitration. See Kevin’s blog for a fuller analysis – as well as this Securities Law Prof Blog.

Webcast: “Pat McGurn’s Forecast for 2012 Proxy Season: Wild and Woolly”

Tune in tomorrow for the always entertaining webcast – “Pat McGurn’s Forecast for 2012 Proxy Season: Wild and Woolly.” Pat McGurn, Executive Director of ISS and the proxy season expert, will recap what transpired during the 2011 proxy season and what to expect for 2012. Here is Pat’s PowerPoint presentation that you should print off in advance of the program…

– Broc Romanek

January 20, 2012

Federal Court Dismisses Umpqua Say-on-Pay Lawsuit

Here’s something that I recently blogged on’s “The Advisors’ Blog“: According to this memo from Wachtell Lipton:

In a decision reaffirming directors’ authority to determine executive compensation, the United States District Court for the District of Oregon has ruled that a suit against bank directors arising out of a negative “say on pay” vote should be dismissed. The court determined that plaintiffs failed to raise a reasonable doubt that the challenged compensation was a reasonable exercise of the board’s business judgment. This is the first federal court decision to dismiss such an action, a number of which have been filed in state and federal courts across the country in the wake of the Dodd-Frank Act. Plumbers Local No. 137 Pension Fund v. Davis, Civ. No. 03:11-633-AC (Jan. 11, 2012).

At issue in Davis was a decision by the compensation committee of Umpqua Holdings Corporation to pay increased compensation to certain executive officers for 2010 — a year in which the bank’s performance had improved and met predetermined compensation targets, but total shareholder return was allegedly negative. In a subsequent advisory “say on pay” vote, a majority of the shares voted disapproved of the 2010 compensation. Plaintiffs claimed that it was unreasonable for the Umpqua board of directors to increase compensation and that the shareholder vote rejecting the compensation package was prima facie evidence that the board’s action was not in the corporation’s or shareholders’ best interest.

The court rejected both of plaintiffs’ arguments. Applying Delaware and Oregon law, the court determined that plaintiffs’ “essential position . . . that if a simple comparison reveals a level of compensation inconsistent with general corporate performance, the business judgment presumption is necessarily overcome, [is] a position that is unsupported by the applicable standards.” The court also held that the Dodd-Frank Act did not alter directors’ fiduciary duties and that a negative “say on pay” vote alone does not suffice to rebut the business judgment protection for directors’ compensation decisions. In so holding, the court expressly declined to follow a prior federal court decision which had denied a motion to dismiss in a “say on pay” action in the Southern District of Ohio, NECA-IBEW Pension Fund v. Cox, No. 11-451 (S.D. Ohio, Sept. 20, 2011).

Davis is a powerful reminder that directors of both financial and non-financial companies may base compensation on long-term goals and choose the yardsticks by which to measure executive performance with confidence that courts will respect their good faith business judgment.

Developments in Private Ordering

Professor Larry Hamermesh gives us some food for thought in his recent blog about “two ostensibly unrelated events in the last two weeks implicate deep questions about the basic role of private ordering and regulation in relation to publicly traded equity securities.”

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– STA Goes After Broadridge on Separately Managed Accounts
– Another Survey: What Companies are Doing in Wake of Whistleblower Rules
– Black Friday: Fraud Auctioning Style –
– Unlisted Companies: Watch Out for Rule 10b-17 Compliance
– Another Court Decision: Importance of Oral Safe Harbor Warnings Before Conference Calls

– Broc Romanek

January 19, 2012

SEC Approves the PCAOB’s ’12 Budget, a 11% Hike

As noted in this Bloomberg article, the SEC unanimously approved the PCAOB’s ’12 budget last week in the amount of $228 million, a 11% hike as the PCAOB takes on new duties overseeing broker-dealer audits. Unlike past years, this approval was not contentious – see Chair Schapiro’s and Commissioner Aguilar’s remarks – as it appears that new PCAOB Chair Jim Doty is handling his new duties nicely, such as better oversight of the IT development process at the agency.

Meanwhile, this Reuters article discusses rumors of two candidates vying for a PCAOB Board slot…

Political Spending Disclosure: CalPERS and CalSTRS Join the Bandwagon

Recently, CalPERS and CalSTRS amended their corporate governance guidelines to call on companies to disclose their policies regarding political contributions. Here’s CalPERS’ press release – and here’s CalSTRS’ press release.

January-February Issue: Deal Lawyers Print Newsletter

This January-February issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:

– M&A in 2012: Out with the Old, in with the New?
– Forward-Looking Statements: Deal Market Trends for 2012
– Joint Development Agreements: A Primer
– Tax Diligence and Tax-Related Provisions in Acquisition Agreements
– Delaware Court of Chancery Seeks To Narrow VeriFone With Potential Unintended Consequences

If you’re not yet a subscriber, try a no-risk trial to get a non-blurred version of this issue on a complimentary basis.

– Broc Romanek

January 18, 2012

Shareholder Proposals: Apache vs. Chevedden (Again)

We’re now in Round 3 of Apache vs. John Chevedden. Here is Apache’s exclusion notice sent to the SEC last week indicating that the company intends to exclude a Chevedden proposal based on eligibility grounds. Apache went the “exclusion notice” route because it’s suing relying on newly minted SLB No. 14F rather than making the typical no-action request (Exhibit H is a separate attachment – and here’s the lawsuit’s complaint). It will be interesting to see if other companies follow this atypical route going forward.

Round 1 was Apache suing Chevedden in 2010 and won its case in the Federal District Court for the Southern District of Texas. As noted in this blog, Apache decided to forego a lawsuit last year in Round 2 and decided to exclude a proposal from Chevedden based on that court win, combined with the fact that KBR sued Chevedden (here’s last year’s exclusion notice filed with the SEC).

SEC Inspector General to Leave His Job

Wow. The original title of this blog was “SEC Inspector General Buys NFL Tickets from Radio Show Host: Does It Matter?” – then came the news yesterday that SEC Inspector General David Kotz was leaving the Commission. So maybe his departure answers the question posed in my former title? That’s not clear. Anyways, here’s what I wrote for this blog entry before the news:

A few weeks ago, I blogged about how SEC Inspector General David Kotz was being investigated by the SEC’s General Counsel for providing a 75-minute interview on a semi-infomercial website. Now, the mass media is reporting how Kotz purchased NFL tickets from a radio show host after appearing on his program. I don’t know enough about the ethics rules to opine on whether this is truly newsworthy. But I am fascinated that the mass media is ready and willing to report on such things. I harken back to a decade ago when things that were SEC-related rarely got coverage. Now, anything related seems to be newsworthy…

Board Effectiveness

In this podcast, Catherine Bromilow of PwC’s Center for Board Governance discusses a new book by PwC and the Institute of Internal Auditors entitled “Board Effectiveness: What Works Best” – which includes anecdotes from active directors about their personal experiences, including insights on their interactions with investors, media, and regulators – including:

– Why did you write the new book?
– What are some of the practical nuggets in it?
– Any surprises when writing it?
– Where can people get a copy of the book?

– Broc Romanek