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."
A few weeks back, I blogged about an executive compensation comment letter that the SEC Staff might have accidentally uploaded. I say “accidentally” because it was pulled off the EDGAR database a few hours after my blog was posted (but note that the comment letter continues to “live on” within the paid databases like Securities Mosaic and 10-K Wizard).
This episode serves as a lesson for companies to monitor their “filings” on the SEC’s website. Here I use the term “filings” pretty broadly, as it now includes content that the SEC Staff might upload (like comment letters) as well as third-party content (like third party tender offers).
[Keith Bishop notes: To someone who grew up in Nevada, October 31 is not Halloween but Nevada Day. We used to get the day off (which worked well with it also being Halloween). The story behind Nevada Day is actually somewhat interesting. Back in 1864, President Lincoln needed support for the 13th Amendment (abolishing slavery). Three more votes from Nevada would help ensure victory. The perceived need for prompt admission was so great that the entire Nevada Constitution (over 18,000 words) was sent by telegraph to Washington D.C. That’s a lot of dots and dashes.
President Lincoln proclaimed Nevada the 36th state on October 31, 1864. Nevada’s new Congressional delegation obliged by voting for the 13th Amendment. Alas, the Nevada Legislature has sacrificed tradition on the alter of convenience and moved observance to Nevada Day to the last Friday in October. NRS 236.015(1). Keith wrote a treatise on Nevada Law of Corporations & Business Organizations (now out of print).]
Compensation Arrangements for Private Equity Deals
Tune in tomorrow for this DealLawyers.com webcast – “Compensation Arrangements for Private Equity Deals” – to hear Jeremy Goldstein of Wachtell Lipton and Shawn Hamilton and Craig Rowley of the Hay Group discuss:
– What are the latest compensation trends and developments when companies are purchased by private equity funds?
– What compensation issues should a target board consider when it’s approached by a private equity fund?
– What type of due diligence should be conducted into a target’s compensation plans by a potential acquiror?
– How should elements of pay be re-balanced and re-mixed when going private?
Please print out these course materials before catching the program.
“We are Overpaid,” Say US Executives
Here is a recent article from the Financial Times about internal pay equity, etc.:
“Most US corporate leaders believe chief executives are overpaid and do not provide value for money for their companies, according to a study that will embolden critics of excessive compensation. The findings – to be published today by the National Association of Corporate Directors – are likely to strengthen calls by investors and politicians, including George W. Bush, US president, for restraint on executive pay at a time of growing income inequality in the US.
Top executives’ criticism of their peers’ compensation levels could also encourage activist investors and hedge funds to target underperforming companies with highly-paid leaders at shareholder meetings. Four out of six chief executives or company presidents polled by the NACD in July and August said the compensation of top executives was high relative to their performance.
Only 2.2 per cent of the nearly 70 chief executives and presidents involved in the survey said compensation was too low, while a third deemed it “just right”. Their views were backed up by outside directors, with more than 80 per cent of them saying chief executives were overpaid.
“There is an overall realisation that executive compensation is an area that boards and management are struggling with,” said Peter Gleason, chief operating officer of the NACD. The issue is particularly sensitive because the gap between rich and poor in America has reached its widest point in more than 60 years.
Figures released last week showed the share of national income claimed by the wealthiest 1 per cent of Americans had reached 21.2 per cent – a postwar record – partly because of booming company profits. Mr Bush last week told The Wall Street Journal that he thought some executive compensation was excessive and that some boards needed to improve their oversight of this.
Nearly 60 per cent of the directors polled by the NACD said the reason for excessive pay packages was the absence of objective ways to measure an executive’s performance. Nearly half criticised the use of options and equity awards that reward executives when the company’s share price goes up, rather than when its operations improve. Investors have become more vocal in attacking what they often call “pay for failure” – large severance packages awarded to ousted chief executives.”
Back in August, a federal district court ordered Merck & Co. to produce thousands of internal electronic documents which the company had vigorously argued were protected by the attorney-client privilege, and held that communications by a lawyer acting in a business capacity are not privileged. This ruling may foreshadow a trend that threatens electronic communications between corporate and in-house counsel, as well as the modern role of corporate counsel in heavily regulated industries. For more info, see this memo from our “Attorney-Client Privilege” Practice Area.
Associate Salary Survey Shows Many Top $200K
Typically, we don’t cover this type of topic in this blog (as it’s well-covered in many others) – but this American Lawyer survey is a jaw dropper…
Over the past five years, the governance movement surely has grown beyond anyone’s imagination. In fact, it has grown so much that the predictable backlash against Sarbanes-Oxley has gained traction on Capitol Hill. However, governance has grown far beyond the dicates of Sarbanes-Oxley.
“Governance” is now applied to areas far beyond the boardroom. For example, here are a number of Capability Maturity Models that are supposed to represent governance models of various business processes. There even is a reference to broccoli!
This is what has happened to governance. It has become a buzzword – many use the term indiscriminately, attaching adjectives to it (such as IT Governance, Project Governance, etc.). Quite a few governance definitions have started to take on a life of their own, without any connection to the original meaning and usage – so that it gets to the point where one can’t assume that everyone is talking about the same thing, even when using the same term.
This is not happening so much for those of us dealing with corporate board governance; rather, it’s happening in those areas where “governance” really doesn’t exist, yet has become a part of the daily vernacular. I’m not sure this really is all that bad, I just worry about those processing my broccoli are fussing too much over it…
Much thanks to independent election inspector Carl Hagberg, who created a Sample Affidavit of Distribution in Word (that we have posted in our “E-Proxy” Practice Area). This Affidavit can serve as a quasi-checklist of all the things that need to be done to ensure that all classes of shareholders will be covered for those using voluntary e-proxy. It’s a draft sample – any comments are welcome by Carl or myself!
The Latest E-Proxy Examples
I’ve got e-proxy on the mind as I prepare to talk about the topic during the Association of Corporate Counsel’s annual conference in Chicago. With nearly 30 companies trying voluntary e-proxy so far, certain trends are becoming evident – some of these will be discussed during our upcoming November 15th webcast: “Annual Reports: How to Create Them for an Online World.”
Taking a quick swing through the IR web pages of some of those companies doing e-proxy reveals that many of them explain very little to shareholders about what they are doing. Not only is that not fair to shareholders in my opinion, that will not help the company reach quorum.
Here are examples of what some larger companies are doing online to explain e-proxy to shareholders:
– Sun Microsystems issued a press release announcing it is using voluntary e-proxy. Sun’s page about it’s annual reports also explains that it is using e-proxy. So far, this is the best online communication to shareholders I’ve seen.
– Nike posted this page that explains e-proxy – the link to this page is called “Electronic Delivery of Shareholder Materials,” in contrast to SaraLee’s “Order Hardcopy.”
– Microsoft does something similar to Nike if you scroll down a little on this page (except I can’t seem to get into that page as the link goes to a .docx file, which is the latest Word format that not many folks have yet – fyi, Microsoft has posted a compatibility pack for XP and 2003 versions of Word, Excel and PowerPoint that allows them to open and read the newest file formats).
Some other companies really confused me – their IR web pages said they are collecting consents for e-delivery; yet their proxy materials indicate they are using e-proxy. Of course, they could be doing both – but if so, they should explain that when they solicit consents.
As many more voluntary e-proxy’ers are expected as we near the calendar year-end, we hopefully will see some more descriptive explanations of what companies are doing – shoot me an email if you see something innovative. I’ll continue to post examples of what companies are doing in our “E-Proxy” Practice Area.
Twenty Years: The ’87 Market Break
This recent NY Times column gave me a chuckle. Joe Nocera recounts where he was when the market sliced 23% off the S&P 500 in a day (do the math to figure out what that means in today’s terms – the Dow dropping 3500 points in a day! About 10x the drop that happened on October 19th this year).
I had a similar flashback because I was on a law school field trip that day, visiting the Philadelphia Stock Exchange. The President of the Exchange was showing us around and began to cry because of the millions he was losing as he talked. Given that I worked at a sandwich shop in addition to a clerkship to make ends meet, I wasn’t moved much – but it still was quite a sight (and I’m sure he made it all back within a few weeks).
A year later, I started my first attorney job as a novice examiner in Corp Fin – and within two weeks of my start date, the SEC held a huge keg party at a local bar to celebrate the anniversary of the market break. That sure don’t happen anymore..
Much sooner than I expected, here is the first comment letter uploaded on EDGAR from Corp Fin’s executive compensation review project. Based on a proxy statement that is related to a director election contest with Carl Icahn, this comment letter was sent to Motorola on August 21st and uploaded a mere six days later.
More likely than not, this uploaded comment letter is an outlier given the SEC Staff’s announcement that comment letters won’t be posted until at least 45 days after the review is completed (which really means the review is “closed” since it’s supposed to include the company’s responses) – so I don’t expect other letters from the review project to be publicly available for quite some time. [Note later in the morning: “poof,” the letter has been erased from the SEC’s website.]
By the way, finding these comment letters may be challenging – the Motorola letter doesn’t come up even if you limit your search to all “Uploaded” correspondence within the last six months. Let me know if you see any in your travels!
And one more aside: check out what happens when you click to enter Motorola’s investor relations webpage. You need to click through a disclaimer regarding the lack of a duty to update. Interesting…
Billy Broc’s Dream
Or is it a nightmare? Billy Broc remembers his precious law firm days in this week’s installment of “The Sarbanes-Oxley Report” entitled “Billy Broc’s Dream.” I hate those prickly comma situations…
[I highly recommend the new George Clooney movie entitled “Michael Clayton.” George plays a down n’ out lawyer whose responsibilities in the Big Firm is to serve as the “fixer.” The tagline is “The Truth Can be Adjusted,” but it’s actually a more realistic movie than I expected rather than typical Hollywood fare.
And for those still wishing that there ain’t no climate change, we have a record 34 days without measurable rain here in the DC area…]
Stoneridge Galore!
Last week, the US Supreme Court heard oral arguments in the monumental Stoneridge case dealing with secondary actor liability. Here is a transcript of the oral argument – and here are a bunch of blogs that covered the action:
Yesterday, the PCAOB proposed Staff guidance – in the form of these “preliminary staff views” – on applying Auditing Standard No. 5 to audits of smaller, less complex companies. Here is the related press release. When the PCAOB adopted AS #5 in May, the Board committed to provide additional guidance on applying the standard to audits of smaller public companies.
The New RiskMetrics Group Structure
For me, it’s gonna take a while to get used to saying “RiskMetrics” instead of “ISS” in the wake of the company’s reorganization. In this podcast, Cheryl Gustitus, Head of Global Communications at RiskMetrics, describes how the recently announced reorganization at RiskMetrics Group impacts ISS, including:
– Where does ISS fit into the reorganization of RiskMetrics?
– How is the ISS division of RiskMetrics now organized?
– Will the policy-setting process of ISS change at all?
– How does that policy-setting process work?
Latest Post-Season Proxy Season Report
Recently, RiskMetrics issued its latest “Post-Proxy Season Report.” Among other notables, this report reveals that as of mid-September:
– 656 shareholder proposals had been voted upon this year, up from 581 at the same time last year.
– 107 shareholder proposals have earned a majority of votes cast, down from 116 proposals last year (two years ago, just 85 proposals received majority support).
– Corp Fin had issued 155 no-action responses allowing the exclusion of a shareholder proposal, up from 129.
Another nugget from Keith Bishop, a former Commissioner of California’s Department of Corporations: Recently, the Department of Corporations issued a proposed rule that would require the registration of hedge fund advisers under California’s Corporate Securities Law of 1968 (the “CSL”). As you might expect, there is a bit of history to this new proposal.
In 1971, the Department issued Policy Letter No. 151 (the “1971 Letter”) indicating that a general partner of a single limited partnership would not have to be licensed as an “investment adviser” under the CSL. The basis of the 1971 letter was the Department’s view that a general partner is, in effect, giving advice to itself rather than to “others” as required under Section 25009 of the CSL. The 1971 Letter had generally been relied on by California-based general partners of venture capital companies (“VCCs”) seeking an exemption from licensing in California as an investment adviser.
In April 1998, the Department issued Release No. 110-C (the “1998 Release”), which essentially revoked the 1971 Letter. In the 1998 Release, the Department indicated that the position taken in the 1971 Letter was contrary to the treatment of investment advisers by the SEC under the Investment Advisers Act of 1940.
I was no longer Commissioner and objected strongly to the Department’s revocation of the 1971 Letter on a number of grounds. In particular, I was concerned with the effect on general partners of VCCs. At my urging, the Department in 2002 adopted Rule 260.204.9 which exempts any investment adviser that:
– Does not hold itself out generally to the public as an investment adviser;
– Has fewer than 15 clients;
– Is exempt from registration under the Federal Advisers Act by virtue of Section 203(b)(3) of that act; and either has “assets under management” of not less than $25 million or provides investment advice to only “venture capital companies,” as defined in the rule.
In 2004, the SEC adopted a new rule (Rule 203(b)(3)-2) and rule amendments to require advisers to certain private investment pools (aka “hedge funds”) to register with the SEC under the Advisers Act. Prior to that time, these hedge fund advisers relied upon the so-called “private adviser” exemption set forth in Section 203(b)(3) of the Advisers Act. That section exempts advisers who (i) has had fewer than fifteen clients during the preceding twelve months, (ii) does not hold itself out generally to the public as an investment adviser, and (iii) is not an adviser to any registered investment company.
Two years later, the DC Circuit in Goldstein v. Securities and Exchange Commission vacated the regulatory framework for hedge fund advisers established by the SEC through its adoption of Rule 203(b)(3)-2 and related amendments. As a result hedge fund advisers can now rely again on the Section 203(b)(3) exemption from the federal registration requirements. The DOC’s rule currently exempts these advisers if they have assets under management of not less than $25 million (i.e., above the threshold for federal registration).
The Department’s proposal represents an attempt to refill the lacuna in regulation that resulted from the Goldstein decision. For those advisers that deregistered under the Advisers Act or who have not registered with the SEC since the Goldstein decision, the Department’s rule would require state-level registration. The comment period for the Department’s proposal ends on November 26, 2007. Here is the Department’s notice, proposed text and initial statement of reasons.
Remember that the SEC adopted IA Rule 206(4)-8 in August. This rule prohibits advisers to pooled investment vehicles from making false or misleading statements to, or otherwise defrauding, investors or prospective investors in those pooled vehicles.
FINRA/NASD’s Fairness Opinion Proposal: Finally Final
After a long wait – and four amendments – the SEC has issued an Order approving FINRA (formerly NASD) Rule 2290 on an accelerated basis (this rule was first proposed in mid-’05). As noted in Amendment No. 4, Rule 2290 addresses disclosures and procedures in connection with the issuance of fairness opinions by a broker/dealer firm. In that amendment, FINRA stated that it will announce an effective date for the new rule in a Notice to Members to be published no later than 60 days following the SEC’s approval and that the effective date will be 30 days following publication of the Notice, so we should know that date soon. Look for a DealLawyers.com webcast on fairness opinions coming soon…
Rep. Barney Frank Opposes a SEC Vote on Shareholder Access
Here is an excerpt from a Tuesday Dow Jones article: “The Securities and Exchange Commission should not vote this year to finalize a rule on a controversial shareholder-democracy issue, and it runs the risk of being overturned by Congress if it does, House Financial Services Committee Chairman Barney Frank said Tuesday.
Frank, Democrat-Mass., said it would be ‘a great mistake’ for the SEC to act on such issues without a full complement of Democrats on the five-member commission. He added that it’s possible Congress could act this year to suspend any SEC action on proxy access.
SEC Chairman Christopher Cox last week reiterated plans to have the commission vote this year to clarify whether shareholders should be able to propose proxy-access measures, allowing them to place the names of their own candidates for corporate boards on company proxy ballots.”
Perhaps I am too close to it (yes, way too close), but what is the appropriate measure to determine whether a conference was worth its salt? To me, the most important measure is the feedback we receive from attendees. So far, feedback from our three Conferences has been very positive – but we’re always looking to improve; please feel free to email me with any criticism you might have. [I feel the same way about our sites; we can only improve if we know what you are looking for.]
Another measure – albeit far less important than the attendee’s experience – is whether the conference received any media coverage. In this category, some of our speakers indeed created some news – the NY Times ran an article based on coverage of our Conferences on no less than three days! And other reporters told me that our Conferences continue to be on their “must attend” list for the content they hear and contacts they make. Here are links to the NY Times articles:
– Comp consultant Ira Kay and our own Jesse Brill discussed a variety of executive compensation practices during several panels of the “4th Annual Executive Compensation Conference”: see Saturday’s article entitled “What if C.E.O. Pay Is Fair?”
– SEC Enforcement Director Linda Chatman Thomsen discussed 10b5-1 plans during her keynote and the succesive panel on those plans: see Thursday’s article entitled “Stock Sales by Chief of Lender Questioned”
– SEC Corp Fin Director John White’s keynote analyzed executive compensation disclosures under the new SEC rules: see Wednesday’s article entitled “S.E.C. Finds Fault on Pay Disclosures”
Of course, the sheer number of attendees is another indicator of a conference’s success. In that department, the result continues to be overwhelming. We had over 2400 in San Francisco (we pulled off a nice wave cheer before Wednesday’s plenary session), with another 3500 online.
Status of Shareholder Access: Open Commission Meeting Soon?
With over 20,000 comment letters in (many of them “form” letters), the SEC appears to be set to hold an open Commission meeting sometime in November to consider at least some of the shareholder access ideas floated this summer. According to a Dow Jones article from last week, SEC Chairman Cox wants some rules in place for next proxy season – here is an excerpt from that article:
“Cox has said that he favored the second approach, under which investors with a 5% stake in a company for at least one year could propose changing bylaws in a way that would allow shareholder-backed candidates to appear on corporate proxy ballots. But the departure of one Democratic commissioner and the planned departure of the other may complicate matters.”
Here is a NY Times article from Sunday – and here is an article from the RiskMetric’s Governance Blog about the future on nonbinding proposals.
An Opportunity to Comment on RiskMetric’s ’08 Proxy Policies
Yesterday, RiskMetrics (formerly known as ISS) put up its “Request for Comment” tool for a number of potential modifications to its policies for 2008. Take advantage of this opportunity to influence these important proxy voting policies through an easy-to-use online form. This year, the topics include:
– Aggressive Accounting Practices (U.S.)
– Cumulative Voting (U.S.)
– Director Attendance (Japan)
– Independent Chair (U.S.)
– Non-Employee Director Limit on Equity Plan Participation (Canada)
– Stock Options for Non-Executive Directors (Belgium and the Netherlands)
– Poor Pay Practices (U.S.)
– Stock Option Overhang in ISS Governance Services’ Binomial Option Pricing (“SVT”) Model (U.S.)
– Say on Pay – Principles for Evaluating Remuneration (U.S. and International)
– Product Safety (U.S.)
When I saw Peggy Foran at our Proxy Disclosure Conference last Tuesday, I was excited to hear that Pfizer planned to unveil a mock proxy statement that had been made more “usable” during Friday’s Center for Plain Language Symposium; Pfizer took its most recent proxy statement and reformatted it. Here is a keynote speech from SEC Chairman Cox at the Symposium.
I was excited because I believe not enough attention has been paid to the usability of disclosure documents. In fact, this is the subject of our next webcast on November 15th: “Annual Reports: How to Create Them for an Online World.” Of course, substance is king – but format plays a role in how investors learn more about a company too. And as I’ve written before, in this new era of e-proxy, etc., the art of writing usable is a skill set that we all need to learn. Studies show that humans read differently online than in paper.
Anyways, I was dumbfounded to see this NY Times article on Saturday that poked Pfizer for creating a mock usable document. From reading the article, it appears that Pfizer was approached to volunteer to create this example – Pfizer was a logical choice because the company has long led the league in trying to push the envelope and serve as this country’s governance leader, particularly under Peggy’s leadership.
True, the Pfizer board made a misstep with its former CEO’s post-retirement pay package – but you still have to give Peggy and company credit for all they have done over the past decade. Today’s hot topic might have been majority vote legislation without Pfizer leading the way in voluntarily adopting a director resignation policy for majority withheld votes. There are numerous other examples of innovation, both big and small. I hope criticism in the press doesn’t stop Pfizer or any other company from trying to do the right thing, particularly something as benign as mocking up last year’s proxy to make it more usable.
[Pfizer hasn’t made it publicly available yet. I intend to post it when I get it and will blog when it’s up so you know since I’ve had so many requests.]
President Bush Attacks CEO Pay (Again)
On Thursday, President Bush attacked CEO pay in an interview, according to this WSJ article. He had first broached the topic in a speech on Wall Street back in February.
I also heard that Hillary Clinton spoke out about the pay disparity between CEOs and the work force while she was stumping in Iowa last week. Clearly, this issue could become one of the issues used to attract voters next November.
Jackpot for History Buffs: Old NY Times Articles Now Free
Recently, the NY Times made its archive of old articles – going back to 1851 – available to the public for free (despite the fact that it says you must pay when you search their archives, it indeed is free). For example, check out this 1935 article about the then new incoming SEC Chairman James Landis. Pretty cool stuff…
Tune in today for more of the same with: “4th Annual Executive Compensation” Conference. The Conference opens with a keynote from John Olson and then gets right into the practical “nitty gritty” of what boards and advisors should be doing vis a vis CEO pay. Plenty of implementation examples, such as how companies have implemented internal pay equity, wealth accumulation analyses, “walk away” number calculations and clawback provisions with teeth.
To watch, come to the home page of either TheCorporateCounsel.net or CompensationStandards.com and click the prominent link that says “Enter the Conference.” Watch the Conference live by clicking a video link that will be on the Conference page that matches the type of player installed on your computer (ie. Windows Media Player or RealPlayer) and the speed of the connection that you have.
Here’s an agenda for today’s Conference; note that times are Pacific/West coast. Panels will be archived a day after they are shown live.
COSO Releases More Internal Control Guidance
A few weeks ago, the Committee of Sponsoring Organizations of the Treadway Commission released its latest Guidance on Monitoring Internal Control Systems. Called a discussion document, the guidance is the first phase of COSO’s attempt to improve the understanding of internal control system. COSO is taking comments this latest guidance.
Ten Years: It Goes By Fast…
It’s hard to believe that a decade has passed since the SEC submitted this Study to Congress about how technology – in particular, the Internet – impacts the securities markets. If my memory serves, I believe the SEC was required to produce a study as mandated by a provision of NSMIA.
Yours truly did the leg work on the Corp Fin chapter of the study; some of the more interesting stuff is in the footnotes, as they describe the pioneers that leveraged the Web. I had a box of really cool stuff that documented those examples (and many more that didn’t make it into the final cut of the Study), but a flood in my basement wiped them out a while back…
Lots of big doings yesterday for our “2nd Annual Proxy Disclosure” Conference. Tune in today for more of the same with: “Hot Topics: The Corporate Counsel Speaks” Conference. The Conference opens with a blockbuster keynote from SEC Enforcement Director Linda Chatman Thomsen.
To watch, come to the home page of either TheCorporateCounsel.net or CompensationStandards.com and click the prominent link that says “Enter the Conference.” Watch the Conference live by clicking a video link that will be on the Conference page that matches the type of player installed on your computer (ie. Windows Media Player or RealPlayer) and the speed of the connection that you have.
Here’s an agenda for today’s Conference; note that times are Pacific/West coast. Panels will be archived several hours after they are shown live.
John White’s Speech, Etc.
I did some real-time blogging during yesterday’s “2nd Annual Proxy Disclosure” Conference, noting this speech by Corp Fin Director John White (fyi, here is the Cleary Gottlieb memo on performance targets mentioned during a few panels). The archived panels from that Conference are being uploaded soon and will be accessible from a link at the top of the home pages of TheCorporateCounsel.net and CompensationStandards.com. Today’s NY Times ran this article on John’s speech and other remarks made at yesterday’s Conference.
Problems with our Online CLE Tracking Tool
If you have registered for video webcast attendance to any our three Conferences this week, please be aware that we are experiencing some difficulties with our new online tracking tool. Rest assured that you can still earn CLE credit if your state bar has accredited our program (most states have).
If you are experiencing problems, simply send us (1) the name(s) of any lawyers who watch the Conference, (2) list which Conferences were watched (and number of hours attended), (3) the state bars for which CLE is sought, and (4) the bar numbers for those states. You can send these to info@naspp.com. We will be sending out CLE certifications out in about a month or so. We apologize for any inconvenience. Sometimes I truly despise technology…
Fictitious? Fishy 409A Guidance
This fictitious IRS notice about death and 409A made the rounds recently…
