Broc Romanek is Editor of CorporateAffairs.tv, TheCorporateCounsel.net, CompensationStandards.com & DealLawyers.com. He also serves as Editor for these print newsletters: Deal Lawyers; Compensation Standards & the Corporate Governance Advisor. He is Commissioner of TheCorporateCounsel.net's "Blue Justice League" & curator of its "Deal Cube Museum."
Earlier this week, the SEC announced that the former CEO of CSK Auto Corporation had agreed to return $2.8 million in bonus compensation and stock profits that he received while the company was committing accounting fraud. Steve Quinlivan notes in his blog how the SEC initially was seeking $4 million to be returned.
Although Maynard Jenkins was not personally charged with “misconduct,” he was still required under the clawback provision – Section 304 – of Sarbanes-Oxley to reimburse CSK Auto for incentive-based compensation and stock sale profits that he received during the company’s fraudulent period. As you may recall from a series of blogs on this case (here is the first blog), this action marked the SEC’s third SOX clawback case against someone who was not alleged to have otherwise violated the securities laws (this Beazer Home CEO settlement was the first and this Beazer Home CFO settlement was the second one obtained by the SEC, even though the CSK Auto case was originated before those two). The Jenkins settlement is now subject to court approval.
The SEC previously charged 4 former CSK Auto executives who perpetrated the accounting fraud, and separately charged the company for filing false financial statements for fiscal years 2002 to 2004. The company settled the charges, and the litigation against three of the former executives is continuing (CSK’s former chief operating officer has since died). The U.S. Department of Justice brought a criminal indictment against those same executives, who have pleaded guilty to various charges. CSK Auto recently entered into a non-prosecution agreement with the DOJ in which it agreed to pay a $20.9 million penalty.
Senators Introduce “STOCK Act” to Stop Congressional Insider Trading
In the wake of the news that some members of Congress are trading on nonpublic inside information – and the fact that it’s legal for them to do that, but for the rest of us – two separate bills have been introduced in the Senate to stop Congressional insider trading, as noted in this article.
Dodd-Frank: GAO Report Urges More Agency Coordination
In the “Dodd-Frank Blog,” Ethan Mark notes a new GAO report analyzing how the federal regulators are coordinating their rulemaking, etc. Here is an excerpt from Ethan’s blog:
GAO examined the 32 final Dodd-Frank Act rules in effect as of July 21, 2011; the regulatory analyses conducted for 10 of the 32 rules that allowed for some level of agency discretion; statutes and executive orders requiring agencies to perform regulatory analysis; and studies on the impact of the Dodd-Frank Act. GAO also interviewed regulators, academics, and industry representatives.
The GAO report found that regulators had coordinated on some of the rules that were effective as of July 2011. It noted such coordination is a positive stepping stone for future coordination. However, GAO also found that most of the coordination, to date, had been informal and ad hoc. GAO also found that most of the federal financial regulators included in its review, including the CFPB, did not have formal policies to guide interagency coordination. According to GAO, while informal and ad hoc coordination can produce the desired results, such coordination can break down when disagreements arise or other work becomes pressing.
Formal policies can institutionalize informal coordination practices and provide a framework for coordinating, helping to ensure that regulators are appropriately consulted and that their views, including conflicting viewpoints, are addressed in a consistent and transparent fashion. Given its membership and charge to help facilitate coordination among its member agencies, GAO believes FSOC is positioned to work with the federal financial regulatory agencies to establish compatible policies that would guide and facilitate interagency coordination among its members throughout the course of Dodd-Frank Act rulemakings.
The new phone book is here! The new phone book is here! Moments ago, ISS released its 2012 updates for its US, Canadian, European and international proxy voting guidelines.
By the way, ISS’s Ted Allen blogged yesterday that a second proxy access proposal has now been submitted to a company – this time to Textron – by the US Proxy Exchange.
The SEC’s Office of the Whistleblower Issues Its First Annual Report
As blogged by Vanessa Schoenthaler yesterday, the SEC’s Office of the Whistleblower has issued its first annual report as required by Dodd-Frank. The report only covers a 7-week period, from the effective date of the final whistleblower rules through the SEC’s fiscal year-end even though tips reported before the final whistleblower rules went into effect are potentially eligible for whistleblower rewards.
Vanessa notes that “During the seven weeks for which data is available, the Commission received 334 whistleblower tips. Among these, the most common complaints related to market manipulation (54), offering fraud (52) and corporate disclosures and financial statements (51). Note, however, these tips were categorized by the whistleblowers themselves, not the Commission, and there are 84 that were submitted under the category of “other” or without a category at all, so it’s hard to say how accurate this information really is.”
Compensation Standards Newsletter: Fall Issue Now Available
For members of CompensationStandards.com, we have posted the Fall 2011 Issue of our Compensation Standards newsletter that contains practical guidance pulled from our successful pair of executive pay conferences. With Dave Lynn and Mark Borges wrapping up the 2012 Edition of Lynn, Borges & Romanek’s “Executive Compensation Disclosure Treatise & Reporting Guide”- about half of the updated Chapters of the Treatise are already posted on CompensationStandards.com – we thought it was best to compile a select group of the Talking Points as our Fall issue (attendees of the Conferences received the entire 200-page set; you can still register to watch the archived video of the Conferences) since it’s too late to insert them in the upcoming edition of the Treatise.
In this study (posted in our “Going Concerns” Practice Area), Audit Analytics estimates the number of New Going Concerns for fiscal year 2010 (a going concern filed for 2010 when one was not filed for 2009). New Going Concerns most recently peaked in 2007 and has been decreasing in number each year thereafter. As of May 31st, fiscal year 2010 received 584 new going concerns, which results in a estimated amount of 637 total new going concerns for 2010. Therefore, going concerns appear to be trending to the lowest amount in ten years.
Reverse Mergers: SEC Approves New Exchange Listing Requirements
Last week, the SEC approved additional listing requirements for companies that apply to list on the NYSE, Nasdaq or Amex following completion of a reverse merger with a shell company.
Cleaning Up Your Internal Controls Checklists: The New SAS 70 is SSAE 16
As noted in the NASPP Blog, the Standards on Standards for Attestation Engagements No. 16 (SSAE 16) replaced SAS 70 as of June 15th. Although this appears mostly to be just a technical change, a lot of companies have references to SAS 70 in their internal control checklists and subcertifications – and sometimes even their audit committee charters – so some cleanup might be warranted…
A retail shareholder activist has filed a proxy access proposal at MEMC Electronics, according to the U.S. Proxy Exchange, a group that represents retail investors. The proposal is the first 2012 proxy access resolution to be made public and suggests that U.S. companies may see more access proposals next season than governance observers have expected.
The resolution was filed Nov. 11 by long-time activist Ken Steiner, said Glyn Holton, executive director of the group. Steiner’s measure is based on a model proposal that U.S. Proxy Exchange members developed over the past month as a more permissive alternative to the SEC’s universal access rule, which would have required investor groups to hold a 3 percent stake for at least three years. While some institutional investors have expressed support for these thresholds, retail activists have argued that those hurdles would be too high and would disenfranchise small shareowners.
The U.S. Proxy Exchange’s model proposal urges a company’s board to adopt a proxy access bylaw that would permit director nominees from: any party of one or more shareowners that has held continuously, for two years, 1 percent of the company’s securities eligible to vote for the election of directors, and/or any party of shareowners of whom 100 or more satisfy SEC Rule 14a-8(b) eligibility requirements (i.e., those who hold at least a $2,000 stake for one year). Any such party may make one nomination or, if greater, a number of nominations equal to 12 percent of the current number of board members, rounding down.
Just last week, the U.S. Proxy Exchange, released a revised model proxy access shareholder proposal as blogged upon by CorpGov.net’s Jim McRitchie, who is involved with this organization. Here are some thoughts on that from Professor Larry Hamermesh…
SEC Chair Schapiro Speaks at Our Conference
Last week, the SEC posted a transcript of the remarks made by SEC Chair Mary Schapiro at our “Say-on-Pay Workshop: 8th Annual Executive Compensation Conference.”
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net 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:
– Limited Support: The SEC’s Proposal to Replace Reg M Investment Grade Securities Exemptions
– Who’s Soft on White Collar Crime!
– Special Litigation Committees & Insider Trading Claims
– FINRA Guidance on Compliance with New IPO Abuse Rule
– FASB & IASB Repropose Revenue Recognition Standard
On Saturday, the Washington Post ran this front-page article about how 8 SEC Staffers have been disciplined by the agency for their failure to uncover Bernie Madoff’s fraud – but no one has been fired. Here is an excerpt:
The SEC’s head of human resources and a law firm hired to advise the agency had recommended that SEC Chairman Mary L. Schapiro fire one person, whom the SEC described as a manager in the office that inspects investment firms. But the chairman decided not to fire the employee, because doing so “would harm the agency’s work,” SEC spokesman John Nester said.
Should someone have been fired? I don’t know because I don’t know the circumstances involved. But as reflected by some of the other inside-the-beltway commentators on the article – there are nearly 600 comments – it is very rare for someone to be fired at a federal agency. During my two tours of duty at the SEC, the only instances of someone being fired occurred during the probationary period after their initial hiring.
And even that was rare – maybe two cases in five years. We would always joke around about how hard it was to be fired in the government, primarily due to the liability risks involved. And I don’t remember any instances of discipline. So as minor as the actions described in the WaPo piece seem to outsiders, it’s actually a big deal for those that work at the SEC…
Nuns Who Won’t Stop Nudging
Great piece in yesterday’s NY Times about the nuns who are shareholder activists. It’s a lengthy piece that covers their history, accomplishments and goals. Here’s an excerpt:
The Sisters of St. Francis are hardly the only religious voices challenging big business. They have teamed up on shareholder resolutions with other orders, including the Sisters of Charity of St. Elizabeth and the Sisters of St. Dominic of Caldwell, both in New Jersey. The Interfaith Center on Corporate Responsibility, the umbrella group under which much of Sister Nora’s activism takes place, includes Jews, Quakers, Presbyterians and nearly 300 faith-based investing groups. The Vatican, too, has weighed in with a recent encyclical, condemning “the idolatry of the market” and calling for the establishment of a central authority that could stave off future financial crises.
“Companies have learned over time that the issues we’re bringing are not frivolous,” said the Rev. Seamus P. Finn, 61, a Washington-based priest with the Missionary Oblates of Mary Immaculate and a board member of the Interfaith Center. “At the end of every transaction, there are people that are either positively or negatively impacted, and we try to explain that to them.”
As the article notes, the topics that the nuns typically select are not ones that attract much support from shareholders. And in talking to some experienced corporate secretaries over the years, I have heard that they are difficult to negotiate with because they often don’t budge from their views coming into a meeting…
Are Some Members of Congress Engaging in Insider Trading?
There’s been news for quite some time that some members of Congress have been engaging in insider trading – a few days ago, convicted lobbyist Jack Abramoff claimed that as many as a dozen have done so. “60 Minutes” included a segment on this topic last night – and as indicated in this transcript of the segment, “insider trading” is defined differently for Congress than the rest of us due to a difference in the laws that apply. Some seek to change that, including this bill called “The STOCK Act.”
Here are three academic studies, with various views on the subject:
Bob Monks is one of the long-time warriors in the battle for corporate governance reform. Ever since creating ISS a long time ago, Bob has been on the front lines to get corporate governance even considered when the need for some type of market reform seemed necessary. That’s why I find his recent piece where he asks ” What does it mean to be a shareholder or owner in 2011?” so interesting. Under that umbrella question, he also asks these four questions:
1. What do owner and shareholder mean in regards to corporations and governance?
2. Can we lump all stock owners together or do we need multiple classes of stock to accommodate owners with different levels of interest and participation?
3. To whom does management owe fiduciary duty when considering the interest of owners? Does having one class of ownership work in management’s favor because it keeps shareholders from ever truly working together to enact change?
4. How can you have “shareholder responsibility” when there is no possibility of shareholders having a common interest and working together. Because there are today so many different classes and categories of shareholders – arbs, derivatives, borrowed stock, etc – that common purpose is impossible.
Bob really does seek feedback on these queries – please post a comment on his blog to weigh in…
Mailed: September-October Issue of The Corporate Counsel
The September-October issue of The Corporate Counsel was recently mailed to subscribers. This issue includes important practical guidance on:
– It’s the Most Wonderful Time of the Year–Gifts of Securities and Rule 144
– Loss Contingency Disclosures–The Latest Lessons from the Staff’s Comments
– Failure to Timely Report Board’s Say-on-Pay Frequency Determination– Inadvertence or Confusion with the 14a-8 Proviso?
– The Staff Gives Accredited Investor/QIB Relief–The Alaska Permanent Fund Interpretive Letter
– Revisiting the Disclosure/Filing Requirements for Non-Compensatory Agreements– It’s Not Just Materiality
– Time to Update Your Shelf Registration Statement (Again)?
– Policing Insiders’ Stock Transactions–FINRA’s New Anti-Spinning Rule
– More on Choice of Forum–ISS Weighs In
– Section 162(m) Disclosure/Say-on-Pay Lawsuits–Time to Revisit Your CD&A Disclosure?
Act Now: Get the “Rest of 2011 for Free” when you try a ’12 No-Risk Trial now.
DOL Issues Guidance on the Use of Electronic Media to Satisfy ERISA Disclosure Requirements
A while back, as noted in this press release, the DOL issued this technical release which sets forth an interim policy regarding the use of electronic media to satisfy ERISA disclosure requirements.
As Ted Allen blogged yesterday, Regis Corporation received more than 71% opposition to its say-on-pay at its annual meeting, which is the greatest dissent seen so far this year. We have added the Regis Form 8-K to our list of failed say-on-pays in our “Say-on-Pay” Practice Area on CompensationStandards.com.
Venture-Backed Companies: Corporate Governance & Disclosure Practices in IPOs
Recently, Wilson Sonsini wrote this 19-page report on the governance and disclosure practices of 50 venture-backed companies that went public from January 2010 through June 2011, including those related to directors and independence, board committees and policies, stock plans, key metrics and non-GAAP measures and defensive measures.
You may also want to check out this presentation by Mark Suster called “The State of Venture Capital and the Internet,” as well as this recent Davis Polk survey on IPO governance practices.
Webcast Transcript: “Lyin’, Cheatin’ and M&A Stealin’: Negotiating the Fraud Exception”
We have posted the transcript for the DealLawyers.com webcast: “Lyin’, Cheatin’ and M&A Stealin’: Negotiating the Fraud Exception.”
Next Thursday – November 17th – is the Society of Corporate Secretaries’ “Issues Update,” which is an online event. Check it out!
We have posted the survey results regarding the latest D&O questionnaires and director independence trends, repeated below:
1. Regarding the level of information that we request from directors in connection with their professional and personal affiliations (excluding immediate family member information):
– We ask each director to submit a list (at least annually) of their professional and personal affiliations – 47.9%
– We do not request a list of their affiliations, but ask specific questions related to the NYSE/SEC independence rules and have them confirm that there are no related issues – 50.0%
– Other – 2.1%
2. Regarding the level of information that we request from directors for their immediate family members:
– We ask each director to submit a list (at least annually) of their entire immediate family – 4.2%
– We ask each director to submit a list (at least annually) of their entire immediate family, including certain other information (such as the place of employment and/or job title) – 22.9%
– We define “immediate family members” and provide a list of the company’s subsidiaries and then ask each director to list any immediate family members doing business with these entities – 16.7%
– We define “immediate family members” and provide a list of the company’s subsidiaries and then ask each director to confirm that there are no related issues – 18.8%
– We do not request a list related to the immediate family members, but ask specific questions related to the NYSE/SEC independence rules and have them confirm that there are no related issues – 37.5%
– Other – 0%
3. Regarding the method(s) of due diligence review that we perform for director independence:
– We rely solely on each director to alert us to any potential independence issues – 36.2%
– We conduct a review (at least annually) of our accounts payable and receivable for ALL professional/personal affiliations (excluding immediate family member relationships) provided by our directors – 8.5%
– We conduct a review (at least annually) of our accounts payable and receivable for ALL transactions related to professional/personal affiliations and immediate family member relationships provided by our directors – 23.4%
– We conduct a review (at least annually) of our accounts payable and receivable for certain transactions related to professional/personal affiliations and/or immediate family member relationships; however, we only perform such a review of selected affiliations/relationships (i.e., we may not conduct a detailed review of certain relationships, such as that in connection with an immediate family member who is employed by WalMart and not in an executive position) – 12.8%
– All – or some combination – of the above – 19.2%
The video archive of last weeks’ pair of Conferences – the “6th Annual Proxy Disclosure Conference” & “Say-on-Pay Workshop: 8th Annual Executive Compensation Conference” – are posted. Hopefully, you’ve talked to some of the many that attended this event and heard how much practical guidance was imparted. Our panels really delivered this year – and it’s not too late to watch them as you can still register and watch the panels now or when you are gearing up to draft your proxy materials.
Our Week of Conferences: Sights & Sounds
Here are three short videos from our week of Conferences this week – this first one shows the sheer size of our “Investors Speak” panel on Wednesday (2000 attendees in person and many more online):
A groovy exhibit from E*Trade in our Exhibit Hall:
Also liked this set-up in the Exhibit Hall from Bank of America/Merrill Lynch:
Last Thursday, as noted in this blog by Jim Hamilton, the House passed the “Access to Capital for Job Creators Act” (H.R. 2940) and the “Entrepreneur Access to Capital Act” (H.R. 2930). The first bill would remove the prohibition against general solicitation for private offerings of securities if all purchasers were accredited investors – and the second bill would require those seeking crowdfunding to notify the SEC, who would then notify state regulators, of any new offerings (but registration would not be required).
Also, as noted in this press release, on Wednesday, the House passed the “Small Company Capital Formation Act of 2011” (H.R. 1070), which would increase the Regulation A offering threshold from $5 million to $50 million (another pending bill is HR 2671, which would increase the total assets threshold from $1 million to $10 million – and the class of equity security holders of record threshold from 500-750 to 1000 – before companies would be required to register under the ’34 Act). The House also passed a bill with no name as far as I can tell (H.R. 1965), which would modify the threshold for ’34 Act registration and deregistration for bank and bank holding companies.
Given that all four of these bills were presented in the magical name of “job creation,” they passed with flying color margins. If they become law (after being combined in some fashion when reconciled with any similar Senate bills that pass), then guys like Angel from Rockford Files can run around selling stock in local brewpubs without looking over their shoulders so much…
On Saturday, the Breeders Cup featured this race that is one of the most exciting ever. Watch the light grey horse in the back of the pack named “Turallure.” And don’t stop laughing about the one called “Compliance Officer”…
DOJ Won’t Probe Ex-SEC General Counsel David Becker
Here’s a Bloomberg article with the latest on the David Becker- SEC IG saga (here’s my last blog on this):
Federal prosecutors have told former U.S. Securities and Exchange Commission General Counsel David Becker that they won’t open an investigation into whether he violated ethics laws, his attorney said. The SEC’s inspector general, H. David Kotz, in September called for the Justice Department to review whether Becker should be criminally charged for having a financial interest in a policy he worked on relating to Bernard Madoff’s Ponzi scheme. Becker inherited profits from the fraud through an account held by his late mother. “We are gratified at the decision, and it’s consistent with our view that Mr. Becker did exactly what he was supposed to do under the circumstances,” Becker’s attorney, William Baker III, said in an interview today.
Becker, who left the SEC in February to return to private legal practice, has said he had no financial interest in the agency’s Madoff policy. He had received clearance from the regulator’s ethics counsel to work on the matter in 2009. He had also informed SEC Chairman Mary Schapiro about the account. Kotz referred his report to the Justice Department’s public integrity section, which reviewed it and concluded a formal probe wasn’t warranted. A department spokeswoman, Laura Sweeney, declined to comment; Kotz didn’t respond to a request for comment.
Also check out this Bloomberg article entitled “SEC Enforcers Frozen as Internal Watchdog Kotz Unleashes ‘Chilling’ Probes.”
PCAOB Chair Speaks: Challenge Our Culture
Last week, PCAOB Chair Jim Doty delivered this speech entitled “Prizes Captured, Shops Sold, Et Cetera: Importance of Keeping Investors Properly Informed.”
We have posted the remarks from Albert Meyer of Bastiat Capital regarding “Egregious Executive Pay Via Stock Options” that were made in connection with yesterday’s “Say-on-Pay Workshop:8th Annual Executive Compensation Conference” for general consumption (the video archive of that Conference is now posted). It’s great to see investors speaking out.
Australia’s New “Two Strikes” Say-on-Pay Law
As roughly 40 companies in the US face the prospect of failing say-on-pay for a second time (and perhaps one company already has, depending on the math – also see this blog about the large number of abstentions), this article about Australia’s new “two strike” law bears reading, repeated below:
Australia’s new “two strikes” law giving shareholders more power to curb excessive executive pay packets, promises to shake up some businesses. Homewares company GUD Holdings has already been hit with a protest vote from 42% of shareholders over the company’s remuneration report, under the new legislation introduced in July.
Under the new amendment to the Australian Corporations Act, if 25% or more of votes cast at two consecutive AGMs oppose the adoption of a remuneration report, then the company must formally respond by asking all board members except the managing director to stand for re-election within 90 days. In addition, key management personnel whose remuneration is disclosed in the remuneration report are excluded from voting, ensuring those with an obvious interest in the outcome cannot vote.
There are few more controversial issues than executive pay. Here in Australia, Qantas chief executive Alan Joyce found himself in the firing line for his large pay increase despite a damaging industrial dispute. Last week, the Australian Shareholders Association indicated it would oppose the remuneration package of Wesfarmers chief Richard Goyder and financial officer Terry Bowen at the company’s AGM in November.
Non-binding vote
Since 2005, Australian shareholders have had the right to vote on the remuneration report of their companies at an AGM. The tougher Australian laws parallel similar moves in the Netherlands, Norway, Sweden and the United Kingdom which have responded to public outrage about executive pay levels. The US has also introduced similar legislation effective from the 2011 proxy season in the wake of public concern about the role of excessive remuneration in the global financial crisis.
New research
Our new research backs the idea that shareholder voting is an effective way to discipline boards over unsatisfactory executive pay arrangements. Using a sample of 240 ASX listed firms between 2001 and 2009, fellow UQ researchers Peter Clarkson, Shannon Nicholls and I investigated the pay-for-performance relationship and its effect on governance. Pay-for-performance is an important metric because it measures how much executive pay changes or varies with firm’s performance. That is, it captures the incentive effect of the remuneration structure. Not surprisingly, a weak pay-for-performance relationship is a focus for shareholder dissent.
Research around the effects of the UK advisory vote, for instance, showed shareholders were more likely to vote “no” on remuneration packages that are excessively high, had a weak pay-for-performance link or were greatly dilutive. We found the average “no” vote on the remuneration report for our sample has increased steadily from 5.4% in 2005 (the first year of the vote) to 11.4% in 2009.
Pay-for-performance
The pay-for-performance relation strengthened across the nine year period, with enhanced remuneration disclosure and the non-binding shareholder vote the most important avenues to achieve greater monitoring and greater shareholder control of the executive remuneration process. Our research findings have important implications for Australian regulators and company directors. Shareholders are increasingly voicing their concerns about excessive executive pay and have used the advisory vote effectively to flag inappropriate remuneration packages to the board.
Our research suggests that boards of directors have listened to their shareholders and have adapted pay packages to be more in line with shareholder expectations. This season, the two-strikes rule gives shareholders an even stronger say on pay and there is every reason to believe that shareholders will use it. For their part, company boards need to listen closely to what shareholders have to say about the remuneration report and respond accordingly. Transparent and careful disclosure about remuneration is more critical than ever this reporting season if company boards are to avoid “striking out” with their shareholders.
