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."
Recently, Senator John McCain has been speaking out against excessive executive compensation and has now joined Senator Obama in calling for mandatory “say on pay.” Here is a Business Week article about this – and here is an excerpt from McCain’s June 10th speech:
“Americans are right to be offended when the extravagant salaries and severance deals of CEOs … bear no relation to the success of the company or the wishes of shareholders,” says McCain, adding that some of those chief executives helped bring on the country’s housing crisis and market troubles. “If I am elected president, I intend to see that wrongdoing of this kind is called to account by federal prosecutors. And under my reforms, all aspects of a CEO’s pay, including any severance arrangements, must be approved by shareholders.”
The proposals that both Senators Obama and McCain support not only would provide shareholders an annual non-binding vote on executive pay, they would also provide shareholders with a separate non-binding vote when a company gives a golden parachute to executives while simultaneously negotiating to buy or sell the company.
With H&R Block joining the list, there are now nine companies that have agreed to a non-binding vote on pay.
Quick Survey: How R&D Intersects with Setting Bonus Amounts
On CompensationStandards.com, we have posted this quick survey to learn more about how research & development costs play a role when it comes time to set bonus levels for senior managers.
This survey was suggested by a doctoral student who is conducting research to gain additional insight into some of the practical issues and challenges faced by those in charge of setting and disclosing executive pay. If you ever have survey ideas, please drop me a line.
Board-Shareowner Communications on Executive Compensation
RiskMetrics is not the only entity seeking comments on a paper. Stephen Davis is looking for input on this Millstein Center paper: “Board-Shareowner Communications on Executive Compensation.” The 17-page paper – which is an executive summary and initial findings – presents findings of a six-month research project that included interviews with directors, senior managers and investors on their views of dialouge regarding executive pay. A final paper will be published once more input is received.
Logically, the “say on pay” movement is addressed in the paper. Given that the media contains reports that some investors are now rethinking their views on “say on pay,” some of the research might be dated already, even though it’s not that old. I personally talked to some investors who now find themselves on the other side; and I find myself leaning against it for now (as I have blogged about). So please send Stephen your comments.
On pages 6-7 of the paper, there is this finding related to say on pay:
Compulsion, through crisis or other acute events, is the foundation under most current US corporate initiatives to foster governance dialogues with institutional owners.
Evidence suggests that scandals over executive compensation – whether payouts for failure or backdating stock options – were key contributors in 2007 in motivating certain boards to increase their interaction with shareowners. Exercises in board dialogue on governance have generally not come about in the United States as a product of proactive, long-term strategic outreach by untroubled corporations. This reality has contributed to growing investor conviction that regular dialogue will not spread widely in the absence of compulsion, even where companies are troubled. As a result, many funds back a UK-style annual advisory vote on executive pay policies, a measure that helped open channels of communication between UK boards and their equity owners.
The Consultants Speak: How the Latest Compensation Disclosures Impacted Practices
At the NIRI Annual Conference, as appropriate for his audience, Corp Fin Director John White devoted a fair portion of his remarks talking broadly about the SEC’s upcoming guidance on the use of corporate websites (here are notes about John’s remarks). The SEC intends to update its interpretive guidance – last issued in 2000 – sometime in the near future. This is a project recommended as part of the CIFiR report (see page 55).
After hearing John’s remarks, I went back to refresh my memory of what the SEC said in 2000. I was pleasantly surprised in that I don’t think much of that old guidance needs updating. The SEC was fairly flexible about what companies can do on their IR web pages; yet, the guidance was inflexible where there might be temptation for mischief. As a result, it’s hard to see how the SEC’s existing guidance has acted as a barrier that has prevented companies from leveraging their IR web pages to communicate with shareholders.
Clearly, companies can’t blame their decisions to not provide shareholder-friendly proxy materials on their IR web pages on the SEC’s existing guidance – since these online materials are not really impacted by the SEC’s parameters much at all. Instead, the SEC’s guidance relates to when companies get “fancy” and build out their IR web pages with other types of information and tools. Even creating annual meeting web pages that campaign are not limited by the SEC’s current guidance.
So where does this leave me? I think the SEC’s upcoming updated guidance should reinforce many of the principles that it already has set forth – along with filling in a few holes and making some tweaks – but the real need is to push companies to start treating their IR web pages as a place where shareholders want to visit to learn about the company and trust it. In fact, I think it makes sense for the SEC to engage in rulemaking that forces companies to post some minimum level of usable documents and other information on their IR web pages.
In recent rulemakings, the SEC has recognized IR web pages as a place for shareholders to go – the latest being the XBRL proposals, which would require companies to post XBRL documents on the same day as they are filed with the SEC – and this seems to be a logical next step. Below I delve more specifically into some of the SEC’s options:
Corporate Website Use: Can the Industry Fix Itself?
I get worried about the recommendation in the CIFiR report that “industry participants” develop uniform best practices. Which industry participants have shown any leadership in this area? None that I can think of. What we do know is that many IR web pages are rudimentary in this country, with a fair number of companies outsourcing them to vendors who also show minimal vision.
In his IR Web Report, Dominic Jones recently provided startling statistics from this past proxy season: almost 90% of US companies chose formats for their online proxy materials that were essentially garbage; compare that to the large companies in the United Kingdom where 46% provided dynamic HTML documents.
US companies have a long road to hoe here – but it’s easily fixable. Plough your e-proxy savings back into usable documents and the IR web page in general – listen to what Doug Stewart of Intel said on last week’s e-proxy webcast. Make your IR web page a desired destination spot that investors are programmed to think of first when they want to conduct research about your company.
Corporate Website Use: What the SEC Should Do
With a hat tip to Dominic Jones, here are a few items that I hope to see the SEC tackle in its updated guidance:
1. Recognize Sufficient Internet Penetration for Regulation FD Purposes – Back in 2000, the SEC requested comments about what is considered sufficient Internet penetration to begin allowing companies to rely on the Web for delivery of information purposes. Some commentators noted way back then that surveys showed that there was sufficient support for the Web as an adequate disclosure medium. This is obviously much more true today and the SEC already has adopted rules that implicitly recognize this. The guidance should address whether information posted only on a corporate site meets Regulation FD’s requirements, etc.
2. Give Smaller Companies a Break from Newswire Fees – The SEC should provide guidance on news releases per se. Can a company meet the requirements by issuing a summary and a link – or even just a notice – advising that it has posted it earnings release on its website and filed it on Edgar? Small companies are hurting from newswire fees. To cut costs, companies shouldn’t have to use press releases to announce an upcoming earnings call or presentation because there are so many alternatives now that are just as good. Another way to cut costs is to allow companies to use summaries and links to reduce their word count in their press releases.
3. Liberalize the Link Liability Standard – One primary concern expressed by some is that the SEC’s current liability approach for linking to other content is too restrictive. For linking to third-party content, in 2000, the SEC came up with a non-exclusive six-factor approach that is a principles-based regulation. When linking from one company document to another – in the delivery context – the SEC invoked the “envelope theory.” [For more on the SEC’s existing link regulatory framework, see these FAQs that I drafted long ago on my old site, but that are still relevant today.]
Even though the SEC’s approach still seems reasonable today, it is too complex and companies uniformly don’t provide access to outside perspectives as a result. Since one of the primary benefits of the Web is the ability to link to related content, I think the SEC should morph its approach and encourage companies to provide insights from multiple sources within certain reasonable limits.
Too often, companies use the existing regulatory framework as an excuse not to link to useful sources of information. Yet, it is hardly ever in an investors’ best interests to have less information or fewer opinions about that topic. For example, companies should provide access to analyst research reports. I recogize that this brings risks – such as selectively linking to only favorable analyst reports – but there are many more ill-informed investors than there are crooked companies and dishonest analysts.
So we shouldn’t punish all investors for the sake of a few bad apples. I believe we are better off allowing companies to leverage the Web and create comprehensive IR web pages – and the SEC can use its enforcement authority to chase the outliers who choose to abuse the freedom.
By the way, it’s not just that the SEC needs to tweak its rules, the NYSE is in the dark ages as Dominic blogged about last year.
Corporate Website Use: What the SEC Should Not Do
In particular, there are two things that I think the SEC should not do when it issues its updated guidance:
1. Don’t Impose Unnecessary “Hoops” on Links – I dislike the notion of using exit notices and click-through disclaimers in the linking context. I don’t think they really warn shareholders and I doubt a court would give them much more weight than a standard disclaimer that sits at the bottom of the page and is not intrusive. And these “hoops” run counter to the purpose of links in the first place – getting folks easily from one place to the next. [And there is sparse caselaw so that its unclear if a court would really distinguish between these types of disclaimers anyways.]
If the SEC is really concerned about content “out of context,” it should focus on the fact that under its XBRL proposal, numbers from the financials will be far removed from the all-important footnotes. And these footnotes will take on much greater importance under IFRS, a principles-based regulatory framework with a much greater level of discretion than under US GAAP.
2. Don’t Try to Specifically Address Evolving Technology – So much of our technology today is still evolving that I don’t think the SEC should try to set standards around specific online functionalities. For example, it’s too early to tell how RSS feeds and IRO blogs will really evolve (I’ll be blogging more about IROs as bloggers later this week). For these, it’s best for the SEC to merely broadly state the obvious about not doing stupid things and allowing these technologies to continue to naturally evolve.
As proposed back in February, the SEC has approved another one-year extension of the compliance date for smaller companies to meet the Section 404(b) auditor attestation requirement of Sarbanes-Oxley. Smaller companies will now be required to provide the attestation reports in their annual reports for fiscal years ending on or after December 15, 2009.
In addition, the Office of Management and Budget is allowing the SEC to proceed with data collection for a study of the costs/benefits of Section 404, focusing on the consequences for smaller companies and the effects of the auditor attestation requirements.
FriendFeed: A New Way to Experience a Conference
Emboldened by my NIRI experience with FriendFeed a few weeks back, I have created a FriendFeed room for the Society of Corporate Secretaries & Governance Professional’s Annual Conference – which starts this Thursday – at http://friendfeed.com/rooms/society08. A big “shout out” to Dominic Jones for leading the way here; FriendFeed only established its “rooms” capability in May, so this is truly cutting-edge.
1. Why Do You Care? – The FriendFeed experience is mind-blowing in that you can envision the future of conferences where the “speakers” are not just the lucky slobs up on the dais – it’s everyone in the room! It will be interesting to see how long it takes for this type of technology to live up to its potential.
If you don’t attend, you can get a flavor of what is happening from those that are there – if you do attend, your fellow attendees can help enrich your experience. For example, at the NIRI conference, I was able to better identify which booths were to my liking by following the recommendations of someone else – and I enjoyed reading commentary about various panels as they happened. Also useful are tips about the conference hotel, nightlife, etc. Of course, all of this becomes more useful when more people contribute – the strength of numbers.
2. How Can You Participate? You can simply read, listen and watch the contributions of others – but of course, it’s more fun if you actively participate. From what I have learned so far, here’s a roadmap about how you can observe or participate (this is all very new and evolving, so some of these might not work for you depending on what technologies you are using):
a. Catch the Highlights at FriendFeed – As noted above, the contributions are – and will – mainly be found on this FriendFeed page. For this first year, it may well be the only postings come from me – but hopefully not. This is an experiment and I imagine it will grow in future years as the tools become more user-friendly and we all learn more about available technology.
To watch others contribute, just click on the room and browse. To actively participate, you simply need to “join the room” by creating a nickname and password for yourself (after first creating a free FriendFeed account). Then, you can participate in any one of several ways described below.
b. Adding a Link to FriendFeed – Here is a short video that explains how to post a link to FriendFeed. Once you register for FriendFeed and watch this one-minute video, you will find it takes mere seconds to add a link to something and write a short comment about it.
c. Commenting on Someone Else’s Commentary on FriendFeed – This truly only takes seconds as you can click on the “comment” section underneath someone else’s contribution and quickly add your ten cents.
d. Uploading Photos and Video on FriendFeed – Uploading multimedia is more time-consuming than adding links and mere text. I will be trying to play around with that during the Conference and we’ll see how I do. It’s fairly easy – with the hard part being uploading a video to YouTube (after first compressing it, which is dependent on the speed of your Net access). So we’ll be at the mercy of the speed of the connections available at the Conference hotel.
e. Twitter, TwitterBerry and Twemes – Due to the “newness” of the technology, there might be Twittering during the Conference that isn’t caught on the Society’s FriendFeed page. Twemes allows you to follow Twitter posts that only relate to your conference (although that service is not perfect either and sometimes misses some Tweets). You can follow them by putting “society08” in the search box at the top of the Twemes home page – or simply go to this Society page.
If you carry a BlackBerry, you can twitter from that device by downloading free software called “TwitterBerry.”
You might ask: what is Twitter? Twitter is a rapidly growing – free – service that allows you to text a message (or it can be done from any browser) that is no longer than 140 characters. Each of these messages is known as a “Tweet.” (Fyi, Twitter is growing so fast that the people running it can’t keep up and they keep having outages.) For Twemes and FriendFeed to capture Tweets about the Conference, you must use this as part of your 140 characters: #society08. Don’t forget the pound sign.
Just like FriendFeed, you must first register for Twitter (at Twitter.com), which is free and easy to do.
f. Tag Everything with “#society08” – To contribute content, you will need to tag your Tweets, Flickr photos, YouTube videos, blog posts, public bookmarks, etc. with the “#society08” tag. That will just make it possible to get everything aggregated in the room.
3. Will I Get in Trouble? – Assuming you don’t upload embarrassing pictures of yourself or give away trade secrets, it’s hard to imagine you getting into trouble for participating. However, if you are paranoid, you can use screen names that won’t identify you when you register for Twitter or FriendFeed (for example, one of my Twitter accounts is under “Captain XBRL”). That way you will feel unemcumbered and can join the “conversation.” Have some fun and see ya in Boca!
Last Week: Early Bird Discount for Our Conferences
As Travis Laster notes, a recent decision has significant implications for special litigation committee practice:
In Sutherland v. Sutherland, C.A. No. 2399 (Del. Ch. May 5, 2008), Vice Chancellor Lamb denied a motion to terminate filed by a single-member SLC, despite finding that the SLC member was disinterested and independent, on the grounds that the SLC did not conduct an adequate investigation. By my count, this is only the fourth Delaware decision to reject an SLC’s motion to terminate and only the second to do so on the basis of an inadequate investigation, as opposed to on the basis of lack of independence.
Key practice points include:
1. Vice Chancellor Lamb rejected the argument that the SLC member was not independent because he was paid his hourly rate for conducting the investigation. Questions about SLC member compensation frequently arise, and the Sutherland decision indicates that paying an hourly rate should be acceptable.
2. Vice Chancellor Lamb was not troubled by the fact that the SLC’s counsel and the SLC did not retain their notes from witness interviews. Prior SLC rulings differed on whether notes of interviews should be retained and whether they would be subject to production during discovery, although at least one decision supported the general practice of not retaining notes. The Sutherland case upholds the general practice in this area. However, because the failure to retain interview notes potentially implicates spoliation issues, practitioners should continue to be cautious, particularly if their actions will be reviewed by courts in jurisdictions other than Delaware.
3. Despite his ruling on the underlying interview notes, Vice Chancellor Lamb appeared quite troubled by the cursory nature of the interview memoranda prepared by the SLC’s counsel. The Court noted that the summaries were “perfunctory” and typically recorded only the questions or topics of discussion, but not the interviewee’s answers. The Court remarked that “Without this information, the Court is unable to ascertain the reasonableness of the SLC’s investigation.”
4. Vice Chancellor Lamb reiterated his concern, expressed in an earlier opinion, that the SLC’s report was “wholly devoid of citations to key documents or interview summaries.” (18 n.34). The Court also noted that “the SLC did not enter any of the underlying documents, interview summaries, affidavits, or deposition transcripts into the record until it filed its reply [brief]. … Needless to say, these facts do not enhance the court’s confidence in the SLC. Not only does the lack of a record hinder the court’s, and the plaintiff’s ability to scrutinize the SLC’s good faith, independence, and reasonableness, it also suggests that the SLC has not taken its obligation seriously and has not acted in
good faith.”
5. Vice Chancellor Lamb expressed concern that the SLC report referred to exculpatory evidence for certain expenses that were the subject of the investigation but did not mention other, problematic evidence. The Vice Chancellor noted that the SLC member and SLC counsel both stated that they were aware of the expenses, yet they were not addressed in the report. In the Court’s words, “[t]he incongruity between omitting analysis of the large, possibly suspicious payments, yet referencing the innocent, generally available discount, raises significant questions as to the good faith of the SLC’s work.”
Practitioners advising or considering the use of an SLC should pay careful attention to the Sutherland case. Most significantly, the opinion indicates that interview summaries should contain significant detail and that the SLC report should cite to evidence and underlying documents, and not merely provide an unsupported narrative.
Even More on Special Litigation Committee Practice
More from Travis Laster:
In the wake of Vice Chancellor Lamb’s Sutherland decision rejecting a special litigation committee’s motion to terminate a derivative action, the SLC moved for reconsideration, and the Vice Chancellor denied the motion in this new decision.
Two points are worth noting for practitioners who advise SLCs:
First, the Court stated that “the touchstone of good faith in the context of a special litigation committee report is its demonstrated willingness to deal openly and honestly with all relevant information.” The Court found that the destruction of interview notes by the SLC, after using the notes to prepare cursory and incomplete interview summaries, undermined the Court’s confidence in the SLC’s actions.
In his prior decision, Vice Chancellor Lamb held that it was not improper to destroy interview notes. Nevertheless, the clear lesson is that if an SLC decides not to retain interview notes, the interview summaries should be considerably more detailed than might otherwise be required if notes are retained and produced. This ruling dovetails with Chancellor Chandler’s holding in Ryan v. Gifford, where he required an investigative committee to produce its interview summaries, notes, and communications with counsel where the committee had not prepared a report and there was no other factual record of what the committee did.
Second, the Court stated that “the SLC was required to investigate the claims in the case, not merely the specific allegations [the plaintiff] made in her complaint.” This is significant because it makes clear that an SLC investigation cannot stop with the allegations of the complaint, but must explore more broadly into the merits of the underlying claims. This may require the SLC to investigate issues that the plaintiff did not identify. Although parsing the complaint can be a way to sidestep difficult issues, the Sutherland decision indicates that the Court of Chancery will not look kindly on such an approach.
The fact that an SLC will have a duty to explore beyond the narrow allegations of the complaint reinforces the need for a board of directors to think carefully before creating an SLC. Put simply, it is not always clear when an SLC is created where its investigation will lead or end. While an SLC can be a powerful device to address derivative litigation, it should not be the knee-jerk response to the denial of a motion to dismiss.
The Perils of Naked Short Selling
As Dave recently blogged, the SEC proposed an anti-fraud rule for naked short selling a few months ago. In this podcast, Dave Patch, Founder of InvestigatetheSEC.com, discusses naked short selling, including:
– What do you see as the most important short issues that we face today?
– How is the SEC addressing those issues?
– What do you think the SEC should be doing?
From Keith Bishop: A few weeks back, a reporter called me about “B” corporations; if you haven’t heard of them, here is an article about the subject. “B” stands for “beneficial.” Proponents hope that the “B corp.” logo will eventually become a well-known seal of approval for socially responsible businesses.
In California, the proponents of B corporations have introduced a bill – AB 2944 – that would explicitly permit directors to consider other constituencies in considering the best interests of the corporation. I found the bill analysis particularly interesting in its reference to the Chicago Cubs and Rutgers (I believe that the case referred to in the legislative analysis is Shlensky v. Wrigley, 95 Ill. App. 2d 173, 237 N.E. 2d 776 (1968)).
As noted in the article, the use of B corporations would have interesting implications in acquisitions since the board of a B corp. could weigh considerations other than financial ones to accept an offer. Learn more about B corps at BCorporation.net.
Back in February, we took a quick look at the scorecard in the options backdating litigation, tallying up the settlements and dismissals, among other things. In our earlier review, of the 36 options backdating cases that have been filed as securities class actions, 7 had settled and 3 had been dismissed.
Run the clock for a few months, and 9 of those cases have now been dismissed and 9 have now settled. The nine settlements total $255.58 million, for an average of $28.4 million. As noted earlier, these cases have settled much more quickly on average, than other cases. The nine cases have settled in an average of just 440 days. Removing the outlier, Mercury Interactive, which was filed earlier and added the options backdating allegations in a later
amended complaint, drops the average time from filing of initial complaint to tentative settlement for the remaining 8 cases to 397 days.
And the ratio of settlements to dismissals is somewhat out of line with historical averages as well. Most studies (and a quick check of our database) indicate that the percentage of new securities class actions that are dismissed is between 33-40 percent. With this group of cases, we can look at the data two ways. Dismissals as a percentage of total cases or dismissals as a percentage of cases that have reached a final, or quasi-final resolution.
Under the former analysis, exactly 25% of these cases have been dismissed. That number is artificially low, as not all of the cases have yet had a ruling on the motion to dismiss. Under the latter method, 50% of these cases have been dismissed. This number is artificially high, as a number of these cases have already survived a motion to dismiss. In any event, things remain interesting in the sometimes long-forgotten world of options backdating.
And law firm lawyers need to watch out. As noted in this article, some firms are being named as defendants in these backdating lawsuits.
We want to clarify that to obtain the “Conference Attendee” discount for the new Treatise, you need to register for one of the October Conferences before you order the Treatise. And since the early bird discount for the Conference expires on June 30th, you will want to register for those Conferences now:
This is worth repeating from Friday’s DealLawyers.com Blog: As the conclusion of one of the more closely-watched cases in recent years in the M&A area draws near (see this IR Magazine article for background; Alan Dye also riffed on this Friday in his Section16.net Blog), a number of amicus curiae filings were made available last week, including a letter from Corp Fin Deputy Director Brian Breheny (as transmitted by the SEC’s General Counsel; this is not a Commission amicus brief). We have posted them in the “M&A Litigation Portal” on DealLawyers.com, as follows:
Here is some analysis from Cliff Neimeth of Greenberg Traurig: In a pending litigation being watched closely by the public M&A bar, institutional activists and target issuers alike, this past Wednesday, in correspondence submitted by Corp Fin Deputy Director Brian Breheny to U.S. District Court (SDNY) Judge Lewis Kaplan, Brian endorsed the view of activist hedge funds – The Children’s Investment Fund (“TCIF”) and 3G Capital Partners (“3G”) – that they were not required under Regulations 13G or 14A to disclose their approximate 12% economic stake in Jacksonville, Florida-based railroad operator CSX Corp. until months after they entered into these arrangements. The hedge fund defendants previously announced their intention and presently intend to elect a short-slate of their five nominees at CSX’ annual meeting scheduled for later this month.
At issue, among many other aspects of the litigation, is the fact that TCIF and 3G were parties to elaborate “swap” and cash-settle derivative arrangements with investment bank counterparties, and that the nature of these contracts did (and do) not confer upon TCIF and 3G any shared or sole voting power over the underlying equity securities. Accordingly, in their view, such arrangements fall outside of the ambit of Section 13(d) and Regulation 13D thereunder until such time as these arrangements are converted into beneficial voting positions.
Although TCIF and 3G, on numerous occassions, announced to the investment community and to CSX directly that they were parties to the swaps and, in fact, made H-S-R (pre-merger notification) filings with the FTC, the absence of a detailed Schedule 13D filing (and subsequent amendments) allegedly enabled them to conduct (over a period of months) a broad range of “coordinating activities” with other institutional holders of CSX, to execute various plans, arrangements and understandings relating to control of CSX, and to otherwise engage in undisclosed “group” activities.
Brian Breheny (expressing the Staff’s position of the appropriate interpretive legal standard and not the position of the SEC’s Commissioners) stated in his letter to Judge Kaplan that “the presence of economic or business incentives that the [swap counterparty] may have to vote the shares as the other party wishes” is insufficient to create the beneficial acquisition of voting power in respect of such shares.
If Judge Kaplan agrees with TCIF’s and 3G’s (and indirectly, Breheny’s amicus) interpretation of the legal standard for disclosure, this would have significant implications for hedge fund activist transaction planners and target companies. If he rules in this direction, it is not unlikely that this may prompt the SEC to accelerate its current assesment of whether Regulation 13D should be amended to broaden its reach to cover these cash-settled (synthetic) arrangements that have become more commonplace over the past several years.
Coupled with the SEC’s e-proxy regime, the current slowdown in traditional economic M&A activity, and the recent Delaware Supreme Court and Delaware Chancery Court decisions in Openwave-Harbinger Capital, Jana Partners-CNET, Levitt Corp.-Office Depot and TravelCenters-Brog (with respect to the efficacy of the advance notice by-laws in those cases), this continues to help fuel an unprecedented level of institutional activism and control contest activity for the forseeable future. This also underscores the need for corporate issuers to examine their “shark repellents” and defensive arsenal.
– 566 companies have used voluntary e-proxy so far (a big leap from 283 at the end of March – understandable since proxy season is in full swing)
– Size range of companies using e-proxy varies considerably; all shapes and sizes (eg. 30% had less than 10,000 shareholders)
– Bifurcation is being used more as the proxy season progresses (but still not all that much); of all shareholders for the companies using e-proxy, now over 10% received paper initially instead of the “notice only” (up from 5% at the end of February)
– 0.85% of shareholders requested paper after receiving a notice; this average is up from 0.45% at the end of March
– 57% of companies using e-proxy had routine matters on their meeting agenda; another 30% had non-routine matters proposed by management; and 13% had non-routine matters proposed by shareholders. None were contested elections.
– Retail vote goes down dramatically using e-proxy (based on 164 meeting results); number of retail accounts voting drops from 21.2% to 5.4% (a 75% drop) and number of retail shares voting drops from 34.3% to 15.8% (a 54% drop)
For the next few days, Dave and I are out speaking in San Diego at the NIRI Annual Conference. My panel deals with e-proxy and I’ll be doing my “usability” bit again – particularly regarding how the proxy card/VIF looks. Take a gander at how this sample (posted in our “E-Proxy” Practice Area) looks like for registered holders. Not too bad. And I’ll be discussing all the other e-proxy related developments that I haven’t yet had a chance to blog about…but will do so in the next few weeks.
And even though he can’t be there himself, Dominic Jones is helping collect Web 2.0 thoughts from conference attendees as it happens. Pretty wild.
Winning the World Series: Cubs Worth More? Or Less?
Friday’s Deal Journal from the WSJ.com included an interview with an economist about how much more the Chicago Cubs would be worth if they won the World Series this year (they are red hot and it’s been 100 years since they last won).
The interview is short and perhaps not complete – but in my opinion, the Cubs would be worth less in the long run if they won. Part of their national mystique is that they are perennial losers. “Maybe next year” is the fan mantra. As someone who grew up down the street from Wrigley Field at a time when they “had it in the bag” – the late ’60s/early ’70s – I personally don’t want to see the streak end…
Speaking of sports, I was bummed to discover in this WSJ article that “Gino” is dead. The “Gino dance” is all the rage at Boston Celtics games this year, based on a clip from a ’70s American Bandstand episode that shows a dancer wearing a “Gino” T-shirt. I went to a game in Boston this year to experience it for myself, but I had seen this clip on YouTube before I went. It’s a classic.
We’re excited that Dan Greenspan has left the SEC to join our staff! Dan spent five years at the SEC, spending the bulk of his time in Corp Fin, including a lengthy stint in the Office of Rulemaking. During the past six months, he toiled as Senior Special Counsel in the Office of the General Counsel. Dan was one of the key players during the SEC’s executive compensation disclosure rulemaking in ’06. He worked for seven years in private practice before his time at the SEC.
Dan nailed his interview when he showed up wearing an Elvis wig and holding a fake cigarette. A lesson for you kids out there. Dan is up and running in his new work clothes – and you can congratulate him at dan @thecorporatecounsel.net (remove the space after “dan” before sending).
The PCAOB’s Newest Board Member: A History Lesson
Several days ago, the SEC appointed Steven Harris to the PCAOB’s board. Steven was a former long-time Senate Banking Committee official, who more recently served as Senior Vice President and Special Counsel of APCO Worldwide.
Steven is the first Hill person to be named to the Board. However, that is not a foreign concept for SEC Commissioners. Current SEC Commissioner Kathy Casey was Staff Director and Counsel for the Senate Banking Committee when she was appointed last year. And the Commissioner I worked for a decade ago – Laura Unger – also came directly from the Senate Banking Committee.
Going back further, Rick Roberts was a former Hill staffer (although technically he left Senator Shelby’s office and went to a law firm for a short while before becoming a Commissioner in the early ’90s). In the ’80s, Lindy Marinaccio was an aide to Senator Proxmire when he was appointed by Reagan. In the ’70s and early ’80s, John Evans served two terms after coming from the Senate.
Then there are the Commisioners who were White House aides when appointed: Joe Grundfest, Richard Breeden and Paul Carey. Given Congress’ intense interest in the markets lately, any of this is not a bad background to have, as navigating Capitol Hill can be tricky. Thanks to Jack Katz for his endless knowledge of SEC history!
Closing Time: When the Founder is Ready to Sell
We have posted the transcript for the DealLawyers.com webcast: “Closing Time: When the Founder is Ready to Sell.”
Okay, you now know why Dave and I haven’t been making silly videos lately – we have been busy jamming on a comprehensive treatise of executive compensation disclosures – Lynn & Romanek’s “The Executive Compensation Disclosure Treatise & Reporting Guide” – so that we can get it into your hands by Labor Day. This thing will be massive: over 1000 pages and is full of explanations, annotated sample disclosures, analysis of possible situations that you may find yourself in, etc.
After you order the Treatise, you will also receive quarterly Update newsletters – so that we can give you the latest practice tips at the crucial moments you need them. And once the Treatise is done, those that order the hard copy also get access to an online version of the Treatise (and newsletters). We haven’t yet figured out the URL for the online version – suggestions are welcome. Here are FAQs about the Treatise.
Order your Treatise now so we can rush it to you right after Labor Day; there is a reduced rate if you are attending any of our Conferences. Order online – or here is an order form if you want to order by fax/mail. If at any time you are not completely satisfied with the Treatise, simply return it and we will refund the entire cost.
Completed the Set: The SEC Staff’s Executive Compensation Comment Letters
As the Corp Fin Staff has nearly finished uploading the 350 comment letters from its executive compensation review project last Fall, we have put the finishing touches on providing links to all the comment letters and responses in the CompensationStandards.com “SEC Comments” Practice Area. Thanks to Dave for the heavy lifting on this one. Note that it might be missing one or two…
RiskMetrics’ “Explorations in Executive Compensation”
Recently, RiskMetrics has put out a draft – and lengthy – set of white papers entitled “Explorations in Executive Compensation.” The project is intended to spark constructive dialogue about executive pay issues and I really encourage you to read their papers and provide comments.
The first white paper – “Considerations” – defines and puts into context the basic elements of U.S. executives’ pay packages, with special attention paid to emerging key considerations for investors in evaluating pay and equity plans in particular. The second one – “Innovations” – offers a pair of new methods of looking at critical issues in executive pay: peer group benchmarking and and the degree of alignment between the risks borne by investors and by shareholders.
SEC Petition: Disclosure about Consultant Conflicts
As I prepare to speak at a director’s college next week on executive pay, I read this recent petition from a group of 21 large institutional investors to the SEC that seeks to require companies to disclose all fees associated with consultant engagements for a single company and any ownership interest a consultant working for the compensation committee may have in the parent consulting firm. This disclosure would be made in proxy statements.
I’m still not convinced that consultant conflicts routinely impact CEO pay levels – and I definitely believe there are many other areas in the CEO pay process that are in greater need of fixing, with a much higher priority. Here is some food for thought – a recent study that concludes that potential conflicts of interest between companies and consultants are not a primary driver of excessive CEO pay (note there are studies that have opposite findings).
Back in March, I blogged about Corp Fin’s new position on health care proposals. Now, the NY Times has caught up with this development in this recent article. The article is pretty good and discusses the Staff’s willingness to allow these types of proposals in the proxies this year, but it neglects to mention the instances where the staff granted no-action relief and allowed their exclusion.
The AFL-CIO has been one of the primary proponents in the health care area. In this podcast, Rob McGarrah of the AFL-CIO’s Office of Investment explains the evolution of shareholder proposals related to health care, including:
– Why did the AFL-CIO choose this topic for its proposals?
– What was the SEC Staff’s historical position for this type of proposal?
– What happened this proxy season regarding these proposals?
Half-Price for “Rest of 2008”
As our site memberships and print publications are on a calendar-year basis, we have reduced our prices for all of our websites and most of our print publications so that they are half price for the rest of this year. Take advantage of these reduced rates in our “No-Risk Trial Center.”
Two New Deputy Directors for SEC’s Enforcement Division
Congrats to Scott Friestad and George Curtis for their promotions to Deputy Director in the Division of Enforcement (and Chief Counsel Joan McKown, who gained additional responsibilities). I dig the related press release, which includes an embedded video from the news conference.
Scott and George replace Peter Bresnan, who left last year, and Walter Ricciardi who “retires” at the end of this month (I put retires in quotes because Walter only served on the Staff for four years and starts at Paul Weiss when he leaves the Commission).
Nasdaq Proposes Change to Continued Listing Standards
From Davis Polk: The SEC has published a Nasdaq proposed rule change that would require listed companies to maintain a certain amount of “public shareholders” rather than a certain amount of “round lot holders” as is currently required for continued listing. According to the Nasdaq, for a variety reasons, it is often difficult to determine compliance with the current round lot holder requirements.
If the SEC approves the proposal, Nasdaq would generally require 300 public shareholders for continued listing on the Nasdaq Capital Market, and 400 public holders for continued listing on the Nasdaq Global and Global Select Markets. In the case of preferred stock and secondary classes of common stock, 100 public shareholders would be required for continued listing on the Nasdaq Capital, Global and Global Select Markets. As proposed, the definition of public holder would include both beneficial holders and holders of record, but would not include any holder who is, either directly or indirectly, an executive officer, director, or the beneficial holder of more than 10% of the total shares outstanding. Under this definition, Nasdaq would consider immediate family members of an executive officer, director, or 10% holder to not be public holders to the extent the shares held by such individuals are considered beneficially owned by the executive officer, director or 10% holder under Exchange Act Rule 16a-1.
No change is proposed to the Nasdaq’s initial listing requirements that also require a certain number of round lot holders because the majority of initial listings are IPOs, where a certain number of round lot holders is already required by SEC rules in order to avoid being subject to the penny stock rules and the number of round lot shareholders can be easily determined by the underwriter when distributing the offering. Nasdaq does propose, however, to clarify that the definition of round lot holders includes beneficial holders in addition to holders of record, consistent with current practice.
Late on Friday, the SEC posted a 143-page proposing release for its mandatory XBRL rulemaking. Based on a quick glance, here are some additional thoughts to the ones I blogged a few weeks ago based on what was said at the open Commission meeting:
1. The Proposed Liability Framework – During the open Commission meeting, it was unclear what liabilities might attached to filing in XBRL – giving the impression that this important issue had not been fully worked out yet. Now that we have the proposing release, we can see on page 60 that the SEC is proposing two very different standards – (i) that the interactive data be considered “furnished” as it is under the pilot program versus (ii) that it be considered “filed” as the “viewable interactive data as displayed through software available on the Commission’s Web site… would be subject to the same liability under the federal securities laws as the corresponding portions of the traditional format filing.” I guess this was a compromise to get the proposal out of the building.
Some of you may be asking – what did he just say? I know that this is confusing. The SEC’s proposal has different liability standards for the XBRL data itself and for the “viewable” data. The former is what the machines read; the latter is what humans read (yes, there is a difference – a big difference; more on this later). So, in other words, the raw XBRL data (the “non-viewable” XBRL data) would essentially carry forward the pilot program’s liability regime (but note that no liability for Section 12 has been added – the voluntary filers program didn’t have this immunity) – and the “viewable XBRL data” would have the same type of liability as the official HTML or ASCII filings have today (and so viewable data would be considered “filed”).
2. Late Filers and “Springback” of Current Status – Under the proposal, the financials in XBRL would be filed as an exhibit under Item 601 of Regulation S-K and be considered part of the company’s “official” filing, rather than as a supplement as is the case in the pilot program. Even though a company would lose its Form S-3, etc. eligibilty if it was late in filing its XBRL data, it could regain its current status once the XBRL information was filed. This is a new concept under the SEC’s regulatory framework. (And there is a proposed pair of 30-day grace periods for the first two years.)
3. Possible Alternative Regulatory Frameworks – As with most SEC proposing releases, the Staff does a great job of posing questions to help solicit comments. In the proposing release, I particularly like the list of questions beginning on page 26. Read them to help you better understand what XBRL is all about.
4. Costs – As Dominic Jones notes in his “IR Web Report,” costs are expected to go up significantly in Years 2 and 3 (when “deep-tagging” will be required) and then will decrease rapidly as each company develops its own customized templates that can be re-used.
5. Foreign Private Issuers – As Dominic notes, the proposed rules would not require foreign private issuers that prepare their financial statements in accordance with a variation of IFRS as issued by the IASB to provide XBRL. Foreign private issuers that provide financial information on Form 6-K or any financial information prepared with non-US GAAP that must be reconciled to US GAAP in the foreign private issuer’s ’34 Act reports will not have to be provided in XBRL.
Just added! We are excited that David Blaszkowsky, Chief of the SEC’s Office of Interactive Disclosure, has joined the panel for our July 16th webcast: “XBRL: Understanding the New Frontier.”
By the way, I’ve learned that the Bush Administration’s moratorium on rulemaking doesn’t apply to the SEC because the agency is considered “independent.” So it shouldn’t impact the SEC’s ability to propose and adopt rules whenever it sees fit (although the SEC may voluntarily decide to abide by the Administration’s edict).
XBRL: A New Enforcement Tool?
This recent Reuters article claims XBRL will help uncover suspicious trading and accounting patterns. The example in the article is the option backdating scandal which was based on a study of the information filed in Form 4s (note that Section 16 forms are not being proposed by the SEC to be tagged in XBRL; they already are tagged in XML). If you recall, uncovering backdating practices gathered steam after Professors Randall Heron and Erik Lie’s study, which gathered Form 4 data starting in ’96 – well before Section 16 reports were required to be electronically filed. The professors relied on the Thomson Financial Insider Trading database to obtain the datapoints necessary for their study (and Thomson filled its database manually until Section 16 reports were required to be filed electronically after SOX).
But if memory serves, the SEC’s Enforcement Staff has to work hard to break open a financial fraud case; it’s not typical that the Staff can discern that numbers are “funny” on their face – rather, the fraud is uncovered by digging beyond the information in the SEC filings. So I don’t think that just running the numbers in XBRL is gonna help much. Most analysts (and I presume the SEC Staff) have long had the technology to crunch numbers using computers. In fact, you can access 10 years worth of financials tagged in XBRL right now for all public companies on TryXBRL.com.
Anyways, I worry that this type of promise about XBRL benefits adds to the boatload of misinformation already swirling around XBRL – but maybe someone can give me some concrete examples to show otherwise? I am certainly not an XBRL expert.
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