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."
We have posted the survey results regarding the latest clawback policy trends, repeated below:
1. Has your company adopted a clawback policy:
– Yes, we adopted a policy during 2010 for first time – 9.6%
– Yes, we already had one before 2010 but we recently amended it – 5.2%
– Yes, we already had one before 2010 and we intend to amend it soon – 28.9%
– Not yet – 56.3%
2. If you answered “Not yet” to question above, do you intend to take any of the following steps in advance of adopting or amending a clawback policy:
– Add provision into terms & conditions of certain incentive awards to enable a potential clawback – 22.5%
– Have executives sign an independent document to enable a potential clawback of incentive awards generally – 7.5%
– Add disclosure in proxy statement about the intention to adopt or amend a clawback policy after finalization of SEC rules implementing Section 954 of Dodd-Frank – 45.0%
– None of the above – 40.0%
3. Does your company plan to adopt a new clawback policy or amend an existing policy:
– Prior to finalization of SEC rules implementing Section 954 of Dodd-Frank – 7.5%
– After finalization of SEC rules implementing Section 954 of Dodd-Frank – 70.7%
– Don’t know yet – 15.8%
– No – 6.0%
4. Once fully completed or amended, does/will your clawback policy apply to:
– Executive officers only – 25.9%
– Group of key employees broader than executive officers – 20.7%
– All employees – 3.0%
– Some provisions of policy apply to certain group of employees and other provisions apply to other groups or all employees – 5.9%
– Don’t know yet – 44.4%
5. Once fully completed or amended, does/will your clawback policy apply to directors:
– Yes, the entire clawback policy will apply to directors – 8.2%
– Yes, but only part of clawback policy will apply to directors – 0.8%
– No, it will not apply to directors – 33.6%
– Don’t know yet – 57.5%
Please take our new “Quick Survey on Regulation FD Practices.”
Nerd Alert: Seeing “10Q” Gets Me Excited
You know you’re a securities law geek when you come across a service called “10Q” and it gets you excited. However, this site has nothing to do with the law – it’s a service that sends you an answer to a question a year after the question is posed. It sends you the answer that you gave to the question; it’s a site to help you gauge how you’ve changed over the course of the year. Sort of like sending yourself spam with a long lag. Hat tip to Michelle Leder of footnoted.com for finding this site…
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:
– Supreme Court: Companies Don’t Have “Personal Privacy” Interest Assertable Under FOIA Exemption
– Even More on ” An Insider’s View of the SEC: Principles to Guide Reform”
– US Accounting Standard-Setting Outlook for 2011 and Beyond
– Which Blogs Should My Directors Read?
– Study: How Non-Executive Chairs and CEOs Work Together
As I have blogged back in January, KBR filed a lawsuit in the Federal District Court for the Southern District of Texas seeking a declaratory judgment that would allow the company to exclude a shareholder proposal submitted by John Chevedden due to his alleged lack of eligibility. Yesterday, the court ruled in KBR’s favor, upholding the Apache decision from last year (which had been filed in the exact same court). We have posted the court’s memorandum and order in our “Shareholder Proposals” Practice Area.
Like Apache, KBR filed a lawsuit rather than attempt to exclude the proposal through the normal SEC channels (and thus challenging the Hain Celestial position of the Staff regarding the use of introductory letters from brokers as evidence of ownership under Rule 14a-8(b)).
Dodd-Frank: A Rulemaking Progress Report
Check out this nifty progress report from Davis Polk regarding all of the various agencies engaged in Dodd-Frank rulemaking. The charts help tell a story…
How Many Chiefs of Corp Fin’s Office of International Corporate Finance? Four
Last month, I posted a poll asking how many Chiefs of OICF have there been over the years. 14% guessed the correct number of four (23% guessed two; 23% guessed three; 22% guessed five; and 17% guessed 67). The four consist of Carl Bodolus (’73-’88), Sara Hanks (’88-’90), Rich Kosnik (’90-’93) and Paul Dudek (’93-current).
I received quite a few emails from folks remembering Carl, the founder of the office, including the fact that he was an incessant chain smoker that he literally lit one cigarette with the last vestiges of the prior cigarette (those were the days when smoking anywhere in the building was permitted).
In his “Proxy Disclosure Blog,” Mark Borges gives us the latest say-when-on-pay stats: with 1349 companies filing their proxies, 42% triennial; 4% biennial; 51% annual; and 4% no recommendation.
On Friday, Corp Fin updated its Financial Reporting Manual for issues related to combined periodic reporting, income averaging, changes in accountants, foreign private issuer financial statements, as well as other changes. Last revised in December (and October before that), 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 as in the past.
Mobile Phone Voting is Here!
In this podcast, Joe Vicari, VP-Business Strategy & Development of Broadridge, describes how Broadridge is facilitating voting by mobile devices, including:
– What is Broadridge’s new mobile voting platform, “Mobile Proxy Vote”?
– Do you have any sense of how often it being used by voters so far?
– Is there anything that companies need to do? Do they need to change their proxy cards or VIFs or their other descriptions of voting processes?
On Friday, as noted in this press release, Broadridge’s Rich Daly sent out letters to CEOs in an effort to increase the level of retail shareholders to vote. These levels have plummeted since e-proxy was adopted.
Webcast: “What the Top Compensation Consultants Are NOW Telling Compensation Committees”
Tune in tomorrow for the CompensationStandards.com webcast – “What the Top Compensation Consultants Are NOW Telling Compensation Committees” – to hear Ira Kay of Pay Governance, Mike Kesner of Deloitte Consulting and George Paulin of Frederic W. Cook & Co. discuss what every director and compensation committee member should be asking, and focusing upon, today as well as practical guidance, inside tips and red flags from those “in the know.”
Note: You need Windows Media to listen to the webcast. Since our webcast provider no longer supports it, Real Player will not work going forward.
Way back over the holidays, I busted a move and spent a few hours creating the world’s largest list of Flintstones characters. Seriously. Not an April Fool’s joke. Search online or in the Flintstones trivia books. You won’t find anything more comprehensive – 118 of them drawn from the original series. I now have a true legacy – something for the tombstone. Remember Gary Granite? Ann-Margrock? J.L. Gotrocks?
Crowdsourcing Poll: Who Is Your Favorite Flintstones Character?
I have included about 30 of the most well-known of the Flintstones characters in this crowdsourcing poll to determine which character is the most popular. Voting is anonymous and you simply click on which of the two characters presented is preferable – then continue doing so as two more choices are presented for as long as you like. Right now, the guy who said “yeah, yeah, I’m hip, I’m hip” is barely beating Bamm-Bamm and Dino for first place.
Proxy Access: Back in the News
After a refreshing hiatus from the news cycle, look for proxy access to be back “in the news” as oral argument is scheduled to take place next Thursday in the Business Roundtable and Chamber’s lawsuit against the SEC…
Our April Eminders is Posted!
We have posted the April issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Yesterday, as noted in this press release, the SEC unanimously proposed rules to implement Section 952 of Dodd-Frank that would direct the exchanges to adopt listing standards relating to compensation committees regarding their use of compensation consultants and other advisors as well as conflicts of interest. These rules ultimately will provide a more detailed definition of “independence” in the compensation context.
From scanning the proposing release that was posted last night, the proposed rules would not add much to Section 952, much to the chagrin of those who emailed me after the meeting and were expecting the SEC to come up with a rules package that the exchanges could just adopt. But even if the exchanges are charged with fleshing out the statute, the SEC surely will be heavily involved behind the scenes as often happens with new listing standards since the SEC must approve them.
Dodd-Frank requires that final rules in this area be adopted by July and the deadline for comments is April 29th. Even if final rules are adopted timely by the SEC, it’s still possible that listing standards may not be in place before the 2012 proxy season since I believe the July deadline doesn’t apply to the exchanges. Memos on the proposal are being posted in CompensationStandards.com’s “SEC Rules” Practice Area.
ISS Policy Change re: Section 162(m) Equity Plan Proposals
Here is something that Cooley’s Amy Muecke blogged a few days ago on CompensationStandards.com’s “The Advisors’ Blog“:
Recently, I learned that ISS has made a mid-proxy season policy change that may affect vote recommendations for equity plans submitted to stockholders solely for purposes of Section 162(m) approval. Historically, ISS has always supported these proposals agreeing that it is in the best interests of the stockholders for the company to be able to grant awards under a plan that satisfies the 162(m) requirements for performance-based compensation that is excludable from the $1M deductibility limitation.
Effective immediately, ISS will no longer automatically support Section 162(m) proposals submitted by “IPO companies” – that is, companies whose public company stockholders have not previously approved their equity plans. Instead, ISS will further analyze the plan and proposal to determine whether any problematic features are more detrimental than the potential loss of tax deductions and if so, ISS will recommend voting against the proposal.
Going forward, ISS signaled that it also may also further scrutinize Section 162(m) proposals submitted by non-IPO companies (i.e., companies whose public company stockholders have previously approved their plans), but it suggested that this year it is primarily concerned with Section 162(m) plans submitted by IPO companies.
Shareholder Proposals: Incentive Compensation & Risk Report Excludable If Too Broad
And here is something that I blogged last week on CompensationStandards.com’s “The Advisors’ Blog“:
Recently, Corp Fin posted this no-action response to Wells Fargo regarding a shareholder proposal that asked the company to prepare a report “to describe the board’s actions to ensure that employee compensation does not lead to excessive and unnecessary risk-taking that may jeopardize the sustainability of the company’s operations. It further states that the report must disclose specified information about the compensation paid to the 100 highest paid employees.”
The Corp Fin response is interesting. It notes that incentive compensation paid by a major financial institution to those that are in a position to cause the company to take inappropriate risks is a “significant policy issue” – but then the Staff goes on to note that the proposal relates to the compensation paid to a large number of employees, thus falling into the “general employee compensation” line of no-action letters since it was not limited to senior executive officers. As a result, the Staff allowed the company to exclude the proposal under (i)(7) as an ordinary business matter.
This letter is interesting also because it presented the Staff with the opportunity to take the position that the general compensation practices that lead to excessive and unnecessary risk taking (and board actions to avoid such risk taking) raise significant policy issues, which would arguably bring its no-action positions in line with the disclosures that the SEC recently concluded should be required in proxy materials. Even though some might disagree with the Staff’s position, it at least avoided yet another exception to the general rule that proposals relating to general employee compensation relate to ordinary business matters and may be excluded under (i)(7). Thanks to Keir Gumbs of Covington & Burling for pointing this letter out!
A few weeks ago, the NY Post ran this piece entitled “SEC whistleblower call draws few tipsters.” In it, the guy who runs the National Whistleblowers Center states he expected 3000 whistleblower complaints per year. Really? For 10,000 public companies – of which more than half are so small that there isn’t much to whistle about – I just think that number was completely unrealistic to begin with – dropping a zero would be more like it, if that…
Farewell to Bowne
With RR Donnelley’s acquisition of Bowne now complete, it is with fondness that I reflect back upon all those late nights at the printers. Over the years, as many of you have, I have sat through drafting sessions at all the printers but I understand that most of those days are behind us given email and other new technologies. Those were the days my friend…
Poll: My Favorite Financial Printer Moment
Please email me your favorite story about being at the printers (I will not share without your permission, as always). Here is a poll about your fondest memories of being at the printers:
One area of governance reform not touched upon enough by Congress in Dodd-Frank or Sarbanes-Oxley is board diversity. It’s an important area to be concerned about – and not just for political correctness reasons. If all of the members of the board have similar backgrounds and experiences, the company’s management (and thus shareholders too) is not getting the benefits that come with having a truly diversified board (see the results in the studies mentioned in this memo).
There have been movements afoot overseas to “fix” undiversified boards when it comes to gender, including Norway (which has a mandatory quota!), Spain and Australia (yet there are still issues globally, as this blog notes). This recent UK report noted it would take 70 years to achieve gender-balanced boardrooms at the current rate of change. This report makes a set of recommendations to effectuate greater changes sooner. However, I’m not aware of much movement in the area of race-balanced boardrooms – and the debate over whether sexual orientation should be considered in a board matrix hasn’t even really begun.
As this speech by SEC Aguilar indicates (Aguilar has delivered numerous speeches on diversity recently), there can be improvement in the disclosures provided by some companies regarding this topic, as newly required under changes to Item 407 of Regulation S-K in late ’09. Of course, better disclosure doesn’t necessarily mean change in the boardroom.
One development that may help speed change here in the US is the idea of creating databases of diversified candidates for boards. I would hope that the director recruiting firms in this country already do something like this – but the idea of government giving a push might not be a bad one. Keith Bishop recently blogged about the possibility of California getting back into this business by resurrecting a director registry that it used to maintain. And DirectWomen is a great place to look for qualified women to serve on boards. We do have resources about this topic generally in our “Board Diversity” Practice Area.
I love Nell Minow’s recent article entitled “Corporate Boards — Still Pale, Male, and Stale.” I imagine that the opening quote in the article – from a CEO, “Oh, we already have a woman” – that was uttered many years ago could just as easily be said today by someone less informed…
Study: No Women on Over 40% of the World’s Largest Boards
Following up on the theme above, consider this new report from GovernanceMetrics International that shows that more than 40% of the world’s largest publicly listed companies have not appointed even one woman to their boards. Did they just blow your mind? It blew mine.
3rd Annual Public Company M&A Nuggets
We have posted the transcript from our recent DealLawyers.com webcast: “3rd Annual Public Company M&A Nuggets.”
John Huber recently began a second career at FTI Consulting. In this podcast, John talks about his new career path, including:
– How does your new job differ from working at Latham?
– How do you envision partnering with law firms in your new position?
– Any thoughts on the current battle over the SEC’s budget?
On Wednesday, the SEC is holding an open Commission meeting to adopt rules that require the stock exchanges to maintain listing standards regarding independent compensation committees and advisors.
More on “The Burden of XBRL Costs on Smaller Companies”
I received quite a few emails in reaction to my recent blog regarding the costs for smaller companies to comply with the SEC’s upcoming mandatory XBRL filing requirement. Many folks believe I underestimated the costs that companies will bear. This is borne out by the poll results on XBRL costs, with 16% saying costs were as expected; 51% saying they were higher than expected and 16% said they were so high that they wish they weren’t public (none said costs were lower than expected and the rest said “what me worry?).
Hallador Energy CFO Andy Bishop forwarded me his letter to the SEC, which explains why he believes smaller companies should be exempted from mandatory XBRL. And Daniel Roberts sent me his blog entitled “Is XBRL expensive?” that analyzes the cost issue nicely, including 5 questions that companies should be asking XBRL vendors. I’m sure we haven’t heard the end of this issue…
With the proxy season in full swing, we are posting new items regularly on our “Proxy Season 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:
– TIAA-CREF Updates Governance Guidelines: No Big Deal
– Practice Pointers: Adjournments of Annual Meetings
– Voting by Mobile Devices & iPads in Corporate Elections
– Retail Proponents Survive Eligibility Challenges
– More on “Benchmarking the Number of ‘Executive Officers'”
One of my favorite movies from the ’80s was “Desperately Seeking Susan” and not because I played with Rosanna Arquette in the sandbox when I was a tot or because Madonna was tremendous in the movie. It was just a great movie.
With Congress placing a big fat target on the SEC’s backside, the movie came to mind because they have called SEC Chair Mary Schapiro to testify so many times in recent weeks that I’m not sure I can accurately count them all (try counting them for yourself; see Dave’s recent blog on the budget fight). It’s clear that Congress intends to defang the SEC as much as it can – and it surely couldn’t come at a worse time given all the Dodd-Frank rulemaking it has on its plate (not to mention a lack of agency resources and the fact that the recent financial crisis is not in the distant background yet).
I certainly agree that the SEC can be improved, but how does Congress really expect senior management over there to do anything when they need to spend all their time testifying (or prepping to testify)? It’s beyond ridiculous. And it certainly sends the wrong message to mainstream journalists who don’t know better and feed hungrily off the “news” it gets from SEC Inspector General David Kotz, who has become too important in the eyes of those outside the agency. An all-powerful IG can’t be good for anyone in my opinion.
The parallel of this to corporate whistleblowing is likely lost on POGO (and Congress). The rare exception (an actual violation) defines the rule and drives the process. Lots of noise, not much substance. Many complaints motivated by office politics. A presumption of organizational guilt (because organizations are perceived to be inherently bad). If the organization doesn’t investigate every allegation, it will be criticized – even though it’s demonstrably a poor use of scarce resources. Imagine if police work was done in the same way. They’d need to formally investigate every crackpot allegation.
And don’t get me started about the recent Congressional hearings (with more hearings to come) about former SEC General Counsel David Becker and his deceased mother’s Madoff investments. I’m not going to even bother reciting any of the outlandish claims made in a frivolous lawsuit or the theater that Congress is now engaged in. I’ll just note that David returned to the SEC in a time of need to serve his country two years ago – leaving a handsomely paid partnership – and this is how he is repaid? I guess no good deed goes unpunished.
Talk to anyone who has real knowledge about the SEC (not the mass media who refers to David as a former “chief council”) and you’ll not find a single person who doesn’t think that David is among the most honorable people you’ll ever meet.
Sorry for all the Friday ranting. Just had to get all this stuff off my chest. Back to straight reporting next week. And a side note: the SEC yesterday hired Anne Small as Deputy General Counsel – Anne hails from WilmerHale, one of many that have been hired from that firm during the past decade or so (egs. Meredith Cross, David Becker, Steve Cutler, Mark Cahn, Joseph Brenner).
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:
– Expanded Whistleblower Regulations: A Potent Combination of IRS Strategies
– SEC’s Enforcement Provides Further Guidance on Cooperation Credit
– Board Communications: Using “In-House” Director Email Addresses
– FASB & IASB Joint Exposure Draft: Offsetting Assets & Liabilities
– Shortcomings of Chinese Listings in the US
Yesterday, as reported in this Bloomberg article and ISS’s Blog, Hewlett-Packard became the fourth company to fail to receive majority support for its say-on-pay, with 48% voting in favor. The company hasn’t yet filed its Form 8-K – when it does, I will add it to our list of Form 8-Ks filed by companies that fail to earn SOP majority support.
And yesterday, I blogged that Hemispherx Biopharma issued this press release announcing that it garnered 51% support for its say-on-pay ballot item. Well, a few members reviewed the company’s proxy statement and Form 8-K and concluded that the company didn’t do its math properly.
These members noted the proxy disclosure that “abstentions will have the same effect as a vote against the proposal” – but that the company didn’t follow that formula when calculating the vote for its Form 8-K. Without getting into the issue of whether the proxy disclosure is correct, it seems like the company didn’t follow the standards disclosed in its proxy statement, an important point to consider as I wrote about in the July-August 2010 issue of The Corporate Counsel (in the section entitled “How to Calculate Voting Result Percentages: Read Your Bylaws (and Compare with Your Proxy).” I do believe this problem is not just an isolated circumstance – as there still is a significant amount of confusion regarding the application of voting standards and the calculation of the vote itself.
Parsing Prudential’s 2011 Proxy Statement
Last week, I repeated Mark Borges’ analysis of General Electric’s proxy statement and all the innovative things they did. A few days ago, Prudential filed its proxy statement and it also contains quite a few innovative items (as could be expected since Peggy Foran’s arrival at the company last year), including:
– 3-page “State of the Union” letter, describing the work the board had done over the previous year on compensation and governance; note this letter is from the board, not the CEO
– Two-page summary at the beginning (pages 7-8) that includes business highlights and summary compensation information
– Highlight boxes on sustainability (pg. 24), corporate citizenship (pg. 23) and shareholder engagement (pg. 22)
The entire proxy statement is filled with color and charts and serves as a good example of an attempt to make disclosure inviting for shareholders. And don’t forget Peggy’s novel “Totes for Votes” campaign to bring in more retail votes, as she recently discussed during our “Conduct of the Annual Meeting” webcast.
Another Clawback Case: Beazer Homes
Here’s news from John Savarese and Wayne Carlin drawn from this Wachtell Lipton memo:
The SEC recently announced a settled enforcement action in which it obtained a “clawback” of prior compensation and stock sale profits from a CEO pursuant to Sarbanes-Oxley Section 304. SEC v. McCarthy, No. 1:11-CV-667-CAP (N.D. Ga. March 3, 2011). This case marks the second time the SEC has obtained this type of relief without alleging that the CEO in question personally engaged in any wrongdoing.
Section 304 requires a CEO or CFO to return incentive-based compensation to an issuer when a financial restatement occurs “as a result of misconduct. . . .” The SEC’s position is that the issuer’s “misconduct” alone is a sufficient predicate for this relief, and that it need not establish any personal misconduct by the CEO or CFO. The SEC’s position is supported by the one federal district court decision that has been rendered on this issue. SEC v. Jenkins, 718 F. Supp. 2d 1070 (D. Ariz. 2010).
The defendant in SEC v. McCarthy is the CEO of Beazer Homes USA, Inc. Beazer had previously restated its financial statements and entered into a settled cease-and-desist proceeding with the SEC, as well as a deferred prosecution agreement with the Department of Justice. The SEC also previously charged the company’s former chief accounting officer with violations of the antifraud provisions of the federal securities laws, but the CEO was never charged with any misconduct in any of these proceedings.
Under the Section 304 settlement, the CEO agreed to reimburse to the company $6,479,281 (comprised of bonus payments plus certain stock sale proceeds); 40,103 restricted stock units; and 78,763 shares of restricted stock. Although the SEC has been silent concerning its general approach to calculating the amounts recoverable under Section 304, this settlement may reflect a recognition that not all proceeds from the sale of stock are appropriately reimbursable. The SEC’s complaint alleges $7.3 million in stock sale profits during the relevant period, yet the portion of the settlement attributed to stock sale proceeds is $772,232.
Finally, the SEC has never publicly articulated the criteria it applies in determining whether or not to pursue such no-fault Section 304 relief. Greater transparency about the Commission’s criteria would be in the public interest. Now that the SEC has had some initial success in establishing that it can recover substantial sums from individuals who are not accused of any wrongdoing, it would be appropriate for the SEC to provide some explanation concerning when it will seek this extraordinary form of relief.
Meanwhile, as noted in this Bloomberg article, the directors of Beazer Homes have been sued alleging that they failed to act in the best interest of shareholders when the directors approved pay raises for the company’s executives while Beazer had $34 million in losses.
