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."
I have to chuckle. The following scenario reminds me of my youth in Chicago, when Cubs fans wore one of two buttons: “Leo Must Go!” or “Leo Must Stay!” Leo Durocher was the embattled manager at the time; I still have one of each button somewhere in a box. Leo coined the phrase, “nice guys finish last.”
1. Pro-Investor? This article states that the White House thinks that SEC Chairman Cox sides with investors too much. Here is an excerpt:
“Of course, even if such a resolution were to finally force Bush to dump Gonzales, it could not require him to choose a successor worthy of the job. But the president is so weak politically, and the supply of plausible nominees with “loyal Bushie” credentials is so small, that he might be forced to choose a person of stature, such as Securities and Exchange Commission Chairman Christopher Cox. After all, Bush did replace the hapless Harriet Miers as White House counsel with Washington wise man Fred Fielding, and the discredited Donald Rumsfeld as Defense secretary with Robert Gates. Other signs are not encouraging, however. In response to suggestions that Cox would be a good nominee, for example, an unidentified White House source told The Washington Times: “Cox has been a disappointment at the SEC.” The reason? “He’s shown too much of a willingness to work with the Democratic members of the Commission.”
Of course, we cannot presume that the Democrats are always in favor of investors though, which clearly may not always be the case.
2. Pro-Business? A Bloomberg article from yesterday notes that Rep. Barney Frank, the House Financial Services Committee Chair, will hold a hearing next month to hear from each of the five SEC Commissioners, in response to criticism that SEC policies are increasingly favoring companies over investors. Here is an excerpt:
“‘There have been concerns that various people have voiced,” Frank, 67, said in an interview yesterday. “There is no point in prejudging, but obviously there are enough questions in the air that we are holding a hearing.’ He cited complaints that recent SEC actions have muzzled the agency’s enforcement division and may make it harder for investors to sue companies.”
Your Friday “Make a Million” business idea? Make some buttons…
As noted in this article, Blockbuster has become the first company to receive the support from a majority of shareholders on a “say on pay” proposal. Most of these other proposals have received significant support from shareholders, as recorded in ISS’ “Say on Pay” Information Center (scroll down on that page).
There have been a number of recent Foreign Corrupt Practices Act settlements entered into by the Department of Justice and the SEC that are quite meaningful, as they illustrate the government’s continued focus on enforcement of the FCPA, including when there is a change in ownership. The most recent settlement involved Baker Hughes, which paid a record $11 million criminal fine.
Last Friday, Corp Fin Director John White gave this speech at Northwestern’s “27th Annual Ray Garrett Jr. Corporate & Securities Law Institute” about the compensation disclosures made during this proxy season. In his speech, John White noted that the Staff’s compensation disclosures review project has begun and would be done in the Fall. I believe the Staff intends to finish its review and then announce its final results, rather than commenting on what it finds in a piecemeal fashion.
Executive Compensation Disclosures: Parsing John White’s Speech
There is quite a bit of information in Corp Fin Director John White’s speech. It’s a “must read” speech if you deal with proxy disclosures at all. Here are some highlights:
1. CD&A and Analysis – First and foremost, John spoke about “Analysis (or lack thereof),” a topic we started writing about in The Corporate Counsel even before disclosures were filed. This will continue to be an area of focus during our October 9th event: “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference.” The agenda for that Conference will be available next week (and includes John, among other Staffers).
2. Performance Targets and CT Treatment – John also discussed several specific areas that the Staff is focusing on. One area involves performance targets, such as whether companies have properly omitted specific target information (ie. whether they meet the competitive harm standard) as well as looking at the adequacy of the disclosures required if performance target metrics are omitted, i.e. how difficult it will be for the officer – or how likely it will be for the company – to achieve an undisclosed performance level or other factors. John also discussed the problem of negative numbers, disclosure about the CEO’s role in setting compensation and perk disclosure.
3. Disclosure Length – John also weighed in about the length of the compensation disclosures, something I have blogged about several times in the wake of a recent Chairman Cox speech that flagged this issue. Taking the risk that excerpts don’t place the statements in proper context, here are some excerpts from John’s speech on this topic:
– “I also think that criticisms of the length and language of the new disclosures can go too far. One of the primary drivers of length of the disclosure in proxy statements is that executive compensation itself tends to be very complicated and varies significantly in form and function, in spirit and letter, from company to company. Even if plain English principles are faithfully applied, under the new rules there may very well be substantially more disclosure required overall.”
– “Criticisms of the length and language of executive compensation disclosures tend to be fairly amorphous complaints. It is also not necessarily clear—if you agree with those criticisms on their merits—whether the problems or weaknesses leading to those complaints are rooted in the rules themselves, or in companies’ failure to comply with the rules. I would urge people to keep in mind, though, that the Commission was seeking to establish a “layered” disclosure approach, with CD&A as the top layer.”
SEC’s Chief Accountant: No Meddling With FASB
Jack Ciesielski notes in his “AAO Weblog“: According to this article on CFO.com, Chief Accountant Conrad Hewitt appeared to deny that the budget actions were linked to any further SEC gains in control over FASB, saying “The budget coincidentally came at the same time as we were [evaluating] candidates,” adding that the SEC’s role over FASB is outlined in a 2003 agreement between the two organizations.” He also said that “FASB is independent as far as we are concerned.We do not appoint board members.” The remarks took place at a financial reporting conference at Baruch College in New York.
The next big scheduled test of how involved the SEC will be in FASB member selection will come up in less than a year. Next July 1, current board member Mike Crooch will trudge into the sunset, and the machinery behind his replacement will click into action around the beginning of 2008. In addition to the usual guessing games about who will be chosen, there’ll be an added element of suspense surrounding the SEC’s involvement – or laissez-faire.”
Conrad’s remarks come after FASB Chairman Bob Herz admitted to concerns about “control” issues with the SEC – as noted in this CFO.com article, Bob pledges to guard FASB’s independence.
Yesterday was another “gold star” day for Mark Borges, as he recapped some of the happenings from the annual meeting between the ABA’s Joint Committee on Employee Benefits and key members of the Corp Fin Staff in his CompensationStandards.com blog – just a few hours after the meeting ended! Mark promises to blog more about this meeting soon, but yesterday he analyzed the discussions about: (1) Prior Year Information for a New NEO and (2) A Perquisite’s “Total Cost.”
Once the official meeting notes are available (which often takes several months), we will post them in our “JCEB Meeting with SEC Staff Notes” Practice Area,” which remains a real treasure trove for informal Staff guidance regarding issues where the securities law intersects with compensation-related arrangements. Thanks to Gloria Nusbacher of Hughes Hubbard & Reed for her scribing all these years!
SEC Filing Fees: Going Up
In Monday’s fee rate advisory, the SEC announced that filing fees will be going up after October 1st (or whenever Congress approves the SEC’s budget, which historically is significantly later than October 1st) to $39.30 per million from $30.70 per million of securities registered with the SEC.
This is a 28% hike – and the first increase in the filing fee rate in quite some time. Not sure why there is an increase (remember how Chairman Cox was quite proud of the steep drop last year, that was quite a drop – over 70%). The SEC’s fee rates aren’t related to the amount of funding available to the SEC; instead, the money goes to the US Treasury – so my guess is that the rate is going up to indirectly fund the Iraqi war.
Inside/Outside CEOs: The Cost of Poor Succession Planning
Paul Hodgson of The Corporate Library has been issuing a score of research reports this proxy season. Below is a summary of a recent report from Paul on succession planning:
It has long been a contention of pay experts – even Jack Welch agreed – that one of the many ingredients ratcheting up CEO compensation is the ‘golden hello’ that is often paid to a candidate recruited to the position from outside the company. Mr. Welch claimed that both Robert Nardelli and James McNerney – each of whom lost out to Jeffrey Immelt for the top job at GE – ended up being paid more than he.
Initial impressions would certainly back that up, with both Mr. Nardelli and Mr. McNerney in receipt of very generous golden hellos. Indeed, in Mr. McNerney’s case, these turned out to be serial golden hellos as he has had two new jobs since leaving GE.
However, as a detailed analysis shows, Mr. Welch’s impressions were wrong in this instance. Taking the last six years of available compensation data, starting with Mr. Nardelli’s and Mr. McNerney’s first years in their new roles, and with Mr. Immelt working as chairman elect at GE, the positioning is:
1. Nardelli
2. Immelt
3. McNerney
Mr. Nardelli leads even without the inclusion of his termination package at the same time as having done, arguably, the worst job of the three in returning value to stockholders. While this example is illustrative of the experience of three CEOs and the actions of four compensation committees, it cannot provide a reliable generalization or conclusion.
In order to come to a more general conclusion, an analysis was conducted of the compensation of 52 S&P 500 CEOs who joined their companies at some point in 2005 (still the last year for which there are compensation details). Of these 52 CEOS, there were 32 inside appointments and 20 outside. No adjustments for industry or size were made to the sample, as each group contained a wide mix of market capitalization levels and industries and this mix on both sides of the sample is likely to have cancelled out any effects on pay levels.
The findings of this study clearly show that – in the first year of employment at least – CEOs recruited from outside the organization are more expensive. As can be seen, the biggest differential lies in total target compensation, which includes the grant date value of equity awards such as stock options and restricted stock, including the hefty up front awards that make up most golden hellos. Particularly at the median, the differential for outside appointees is considerable. They earn almost 2.6 times the target compensation of their inside appointee peers in their first year of employment.
One of my more popular blogs lately was one about how the Associated Press reports on total compensation numbers. Now, Moody’s explains how they look at what has been disclosed in the new batch of proxy statements filed this proxy season.
– What is the purpose of Moody’s new user guide for compensation disclosures? Why did Moody’s put one together?
– In your staff’s review of the disclosures made so far, which areas do you think are being adequately disclosed? Which areas need improvement?
– What do you recommend that companies do for next year?
More on the “Readability” of Compensation Disclosures
I’m still getting plenty of feedback from my blog about the SEC Chairman’s recent comments on the lack of plain English in compensation disclosures. One of the themes in these responses is how – after a decade since the SEC’s plain English initiative began – practitioners had never heard of the metrics used in the Chairman’s speech. These commentors point out that the Gunning-Fog and Flesch-Kincaid tests are not mentioned a single time during any of the SEC’s plain English rulemaking or commentary over the years.
In the wake of the Chairman’s speech, a group of compensation consultants conducted this follow-on readability study that is pretty interesting, looking at more disclosures, the SEC’s rules themselves and even Dr. Seuss’ “Green Eggs & Ham” for comparison purposes.
The upshot is that I think the SEC will have to revisit the plain English requirements if it is going to insist on using the metrics that the Chairman mentioned in his speech, because it doesn’t look like any company is coming anywhere close to what has been targeted as a “good” score. And I would bet that would be true for disclosure in any SEC filing, whether it be a proxy statement, prospectus, etc. This situation might be saying as much about these metrics as they do about disclosures generally; I think the metrics have to be examined more carefully before being applied as the litmus test of whether it is “good disclosure.”
Meanwhile, I imagine it won’t take long for shareholder activists to grab onto this issue – particularly since Microsoft Word has a tool that allows anyone to easily gauge the “readability” of a document. So my advice is for all companies to run the numbers and find out the readability of their CD&As (and other disclosures) now before someone comes calling. And of course, we wouldn’t be surprised to see Corp Fin get back into the business of issuing plain English comments. Should be fun…
Implementing the SEC’s Compensation Rules: Companies Start Providing Feedback
Even nine months after the SEC adopted its final executive compensation rules, it is still receiving comment letters on them. The first company to weigh in on the new rules after filing its initial proxy statement under them is Leggett & Platt, with this comment letter that focuses on confusion in the media in reading the disclosures as well as the impact of the sudden December rule change made by the SEC.
Leggett & Platt is not the only company frustrated by the SEC’s December change in the rules. As Marc Trevino and Joseph Hearn of Sullivan & Cromwell noted in their survey of compensation disclosure trends by the Fortune 50, Citigroup decided to include multiple pages in its proxy statement regarding the meaning of retirement-eligible accounting under FAS 123R, including this excerpt:
“In the view of the committee and Citigroup, the December 2006 SEC release regarding reporting of equity compensation in the Summary Compensation Table does not reflect the way the committee and Citigroup analyze and make equity awards. Under the new rules, the treatment in the Summary Compensation Table of awards with the same terms for all the named executive officers may differ depending on age and length of service with Citigroup, and accordingly, may make it difficult to discern the committee’s judgments about executive performance for 2006. The purpose of the foregoing discussion and disclosure is to make it clear that the committee made incentive awards for 2006 and in prior years based on the fair value of the awards and not on the accounting treatment of those or prior awards on Citigroup’s financial statements under SFAS 123(R) or other applicable accounting standards.”
As I have blogged about before, academics – and now the SEC Staff – have been scrutinizing transactions made under Rule 10b5-1 plans to see if the “next” scandal is afoot (Kevin LaCroix has a nice recap about this in his D&O Diary Blog).
In this podcast, Barrett Howell of Haynes and Boone delves into some of the latest Rule 10b5-1 plan developments, including:
– Why have 10b5-1 plans come under scrutiny by the SEC Staff recently?
– How are such plans relevant in securities law class actions?
– What can companies and insiders do to protect themselves from allegations in these class actions?
Today’s “Federal Proxy Rules and State Corporation Law” Roundtable: Agenda and Briefing Paper
Today is the first of three SEC roundtables on the proxy process scheduled for this month; today’s roundtable is focused on how the federal proxy rules intersect with state corporate law.
Here is today’s roundtable agenda – along with its all-star line-up (albeit a tad heavy in the academic department for my tastes) – as well as a briefing paper.
NASD: Change in Proposed Rules for Real Estate Underwriting Arrangements
Recently, the NASD posted Amendment No. 2 to its proposed rules regarding the underwriting terms and arrangements of public offerings of direct participation program securities (“DPPs”), i.e., limited partnershps and other pass-through entities, and REITs. The amendments are significant, responding to comments from last July’s proposal. Since the rule filing includes a draft Federal Register notice, it is hoped that the SEC will republish the proposal for comment.
For folks in the real estate industry, this is a long-awaited SEC filing because it sets out the procedures that the NASD will use to allocate compensation of dual-employees of broker/dealers that sell DPPs and REITs (and amends what many viewed as a highly problematic proposal). The revised structure, if implemented with some discretion by the NASD Staff, should work and make reviews of DPP and REIT offerings less problematic in the future. Nonetheless, there remains areas of uncertainty about the practical application of certain of the amendments and republication of the amended proposal appears necessary to help resolve these areas.
Believe it or not, today marks five years that I have been blogging. To toot my own horn, I believe I was the first lawyer to blog on substantive law issues. When I started back in 2002, a handful of lawyers were blogging about the marketing aspects of blogs, but not about the law itself. For the first year or so, whenever I told someone that I was blogging, I had to explain what it was. Only 25 more years to go until retirement!
Do me a “solid” and take this brief survey on my blogging…
[Your Friday “Moment of Happiness”: Here is a hilarious “don’t mess with this blogger dude” saga].
Answers About “Readability” of My Push-Out Blogs
Many of you have inputted your e-mail address in the box to the left of this blog, which enables you to receive an e-mail notification when I blog each morning. This notice includes the text of that day’s blog entry – but it’s not in the easiest-to-read format.
Unfortunately, there is nothing that I can do about this problem, as it’s a function of the blogging software (ie. Movable Type). Moving to another piece of software would be a killer because I have five years worth of archived blogs on this page that I would need to import.
The easy fix for you: most people just click on the link at the top of the e-mail when they get the blog sent to them and that sends them to the blog itself which is much easier to read…
Holy Sherlock Holmes! SEC’s Enforcement Staff Finds the Pipe Bomber
As noted in this article, there were over 150 law enforcement officials (including over 100 postal inspectors) trying to figure out who sent pipe bombs to a number of mutual fund companies. It was the SEC Staff who found him using trading records – and only 3-4 staffers were involved. As many of you know, it’s very unusual for the SEC to be tracking down this type of criminal – normally they are investigating those involved in problematic PIPEs…
John White on the Foreign Private Issuer Community in 2007
On Wednesday, Corp Fin Director John White delivered this speech on “Corporation Finance and the Foreign Private Issuer Community in 2007.”
The SEC’s Office of Inspector General has been busy, issuing no fewer than four reports this week (even though some are dated March). The most important one is “Audit of Full Disclosure Program’s Staff Interpretive Guidance Process,” given that it is a topic frequently criticized by SEC Commissioner Atkins and something that is a lifeblood for many of us.
Here are my “Top Notables” about this 18-page report (listed in order of where they are mentioned in the report):
1. It took the Inspector General’s office 10 months to draft its report. (pg. 2)
2. The report states that most interpretive guidance comes from four groups of the Staff (Corp Fin’s Office of Chief Counsel and Office of Chief Accoutant and two offices in the SEC’s Office of Chief Accountant). I’m stumped why the report doesn’t include three of Corp Fin’s other specialized offices, which provide plenty of guidance: Office of Mergers & Acquistions; Office of International Corporation Finance and Office of Edgar and Information Analysis. (pg. 3)
3. Corp Fin as a whole answered 32,500 phone calls during 2005 – ouch! (pg. 4)
4. The report notes that Corp Fin’s Office of Chief Accountant provided advice on 340 referrals to Enforcement during 2005 – but oddly doesn’t mention Corp Fin’s Office of Enforcement Liaison, whose main function is to provide advice to Enforcement. (pg. 4)
5. Corp Fin/OCA runs its SABs through the Commissioner’s legal counselsors typically. The Inspector General recommends that the Office of General Counsel look into compliance with the Administrative Procedures Act relating to the processes involved in the SEC issuing SABs, as well as interpretive guidance from the Staff generally. In my view, this is the report’s bombshell as it has the potential to really gum up the works. (pg. 4-5)
6. Corp Fin doesn’t post shareholder proposal no-action responses on its website due to resource limits; it is recommended that Corp Fin post these responses. (pg. 5)
7. The Inspector General is looking for confirmation that Corp Fin’s Shareholder Proposal Task Force does indeed take mailing deadlines into consideration when processing no-action requests. I haven’t heard any company complain about Corp Fin not being conscientious of this need. (pg. 7)
8. Corp Fin issues comments on non-shareholder proposal no-action letters within 30 days of filing – its stated goal – about 50% of the time. (pg. 7)
9. Corp Fin may be updating its 25-year old interpretive release on how to submit no-action letters, including the format they should take. (pg. 11)
10. The report includes esoteric commentary about “uploading” internal documents. This is a process that commenced near the end of my last tour of duty in Corp Fin and luckily I never had to upload a single document. (pgs. 11-12)
The SEC’s IG also issued these reports on Enforcement Peformance Management and Backlog of FOIA Requests for Comment Letters. Before these, the last Inspector General report involving Corp Fin was issued last summer; it dealt with continuous surveillance of larger companies and lifted the curtain a little bit on Corp Fin’s screening process.
Resume Indiscretions Possible at the SEC?
Another new report from the SEC’s Inspector General deals with verification of bar memberships. Not only is it interesting that the SEC hasn’t been verifying bar memberships in light of the highly publicized cases of resume indiscretions in the news lately, it’s interesting because – not so long ago – it was a big deal for a SEC lawyer to pass a bar.
During my first tour of duty in Corp Fin, the SEC didn’t have the luxury of so many lateral hires like it does now. Back in the “day,” most new lawyers came right out of law school. Our new jobs weren’t “official” until we passed the bar and when you did, you were promoted from “law clerk” to “lawyer.” There was a one-year probation period during which you had to pass the bar; so if you failed the bar twice, your probation period will likely have run and you were booted out of the SEC!
The IG’s report does note that lawyers fresh out of school do indeed still have their bars checked; it’s the horde of lateral hires that apparently have not been verified. I’m surprised the SEC fell down on this because it’s pretty easy these days to go online to a state bar website and verify membership. If there was one area I could see falling through the cracks, it would be verifying that Staffers remain members of the bar (eg. someone doesn’t pay their bar dues). It’s easy to forget about – or ignore – state bar requirements.
No mention in the report about whether the SEC checks the CPA licenses of the accountants…
The NYSE Speaks: Latest Developments and Interpretations
We have posted a copy of the transcript from our popular webcast: “The NYSE Speaks: Latest Developments and Interpretations.”
There has been quite a bit of commentary about what the SEC did – and didn’t do – in the Apple option backdating case last week. As this SEC press release notes, the SEC brought charges against Apple’s former General Counsel and former CFO Fred Anderson, but didn’t seek a bar against them as an executive or director of another public company (nor has the SEC brought any action against the company itself). The former CFO currently serves as the head of eBay’s audit committee.
From the complaint filed in US District Court by the SEC, it appears that Apple’s CEO Steve Jobs was fully aware of the implications of what was going on with the backdating. It is interesting that the CFO discussed backdating with the CEO, then did it and apparently did not inform the auditors about it – but some argue he did not do it “intentionally”; it seems pretty clear to me from the complaint that the CFO did mean to backdate the options.
And right after the SEC announced what it intended to do in the Apple case, former CFO Anderson spoke up in this WSJ article to claim that Jobs misled him. And then this Joe Nocera column from Saturday’s NY Times gives this story another twist, providing details about why certain mega-grants of options were awarded to Jobs in the first place.
Lawsuit Dismissed: Backdating Alone Not Sufficient to Prove Fraud – But Not Over?
A few weeks ago, Judge Alsup of the US District Court for the Northern District of California granted the defendants’ motion to dismiss the consolidated shareholders’ derivative complaint filed in the connection with alleged backdating at CNET Networks, based on plaintiffs’ failure “to plead with particularity that demand on the board was excused as futile.”
But then, on Monday, Judge Alsup issued a follow-up order to his CNET dismissal, after receiving briefing from the parties. The Judge is allowing the plaintiffs to amend (noting in particular that they should be more specific about whether the company’s compensation committee was allowed to delegate its authority), though he’s denied them discovery. He’s also opened up the possibility of staying the action while plaintiffs pursue discovery through Section 220 of the Delaware General Corporation Law.
So although the original order might end up being useful to those of you mired in backdating litigation – as it shows that plaintiffs will have to allege more than merely that options grant dates differed from the measurement date, or even that the directors received backdated options – there could be future developments. We have posted copies of the order of dismissal dismissal and the follow-up order in the “Backdated Options/Grant Policies” Practice Area on CompensationStandards.com.
Much thanks to Kevin Muck and Felix Lee of Fenwick & West for keeping us apprised of the developments in this potentially important case – here is their memo on the dismissal (and here is a CFO.com article – and a D&O Diary Blog on it). And on a somewhat related note, Kevin LaCroix has a blog about the first settlement of a backdating-related class action lawsuit.
Chairman Cox: SEC Will Resolve Option Backdating Cases Soon
Last Wednesday, in this Reuters article, SEC Chairman Cox apparently stated that the SEC’s investigation into improper awards of options at many of the 130 companies under examination will be resolved within the next few weeks…
Because the response to the first few issues of Compensation Standards has been so positive – with many companies asking for permission to provide additional copies to all their directors – we have decided to provide complimentary subscriptions to the popular Compensation Standards print newsletter to all our friends for the rest of this year. Hot off the press, here is the latest issue: Spring 2007.
Act Now: To receive these complimentary issues, you can do so in one of three ways:
(2) you can email us a list of all the contact information for you and your directors to info@compensationstandards.com (for the directors, we just need their mailing information, company and title; for you, we would also need your email address, phone number and fax number).
(3) you can email us at info@compensationstandards.com with your contact information (including title, company, mailing address, email address, phone number and fax number) and the number of copies you need (which you would then forward to your directors).
If you need assistance, contact our HQ at info@compensationstandards.com or 925.685.5111. Note our HQ is on the West Coast with hours of 8am – 4pm.
Senate Takes Up “Say on Pay” Bill
From ISS’ “Corporate Governance Blog“: After the passage of the “Shareholder Vote on Executive Compensation Act” by the U.S. House of Representatives, Senate Democrats are making it known that they, too, want shareholders to have a vote on executive pay.
A bill seeking to amend the Securities and Exchange Act of 1934 to give shareholders at public companies an advisory vote on executive compensation–or “say on pay”–was introduced April 20 in the U.S. Senate as a companion to the House bill approved the same day. The House legislation passed by a vote of 269-134, indicating that it got some Republican support.
Senate Bill 1181, which was introduced by Sen. Barack Obama of Illinois, proposes an annual vote on the executive compensation disclosed in proxy statements under the new Securities and Exchange Commission’s standards. Companies would be required to allow a non-binding vote on the compensation disclosure and analysis (CD&A), summary compensation tables, and related material, starting in 2009.
Like the House measure, the Senate bill would give shareholders the opportunity to vote on any severance agreements that are reached while a company is considering a takeover offer or merger.
S. 1181 has been referred to the Senate Committee on Banking, Housing, and Urban Affairs, and has attracted co-sponsorships from at least four of Obama’s fellow Democrats, including Sen. Sherrod Brown of Ohio, Sen. Tom Harkin of Iowa, Sen. John Kerry of Massachusetts, and Sen. Richard Durbin, also of Illinois.
In his invitation to co-sponsors on April 24, Obama wrote, “It’s time that we not only make executive compensation packages more transparent, but that we also allow shareholders to express and debate their views on those packages.”
The Bush administration has expressed opposition to the House legislation, saying it “does not believe that Congress should mandate the process by which executive compensation is approved.”
Understanding What “Say on Pay” Means
To review a new ISS 18-page white paper on pay votes in international markets, please go to the ISS’ “Say on Pay” Information Center. Note that, in this Center, you can track the results of how shareholders voted on “Say on Pay” proposals as they happen.
Our May Eminders is Posted!
We have posted the May issue of our complimentary monthly email newsletter. Sign up to receive it today by simply inputting your email address!
Scandal-ridden Comverse (you might recall the former CEO is on the lam in Africa) adopted a shareholder access bylaw last week in an attempt to defuse shareholder anger. See Article IV, Section 3(b) of Comverse’s restated bylaws.
Below is an excerpt from ISS’ “Corporate Governance” Blog: In a ground-breaking development, Comverse Technology has adopted a proxy access bylaw, a move that may encourage other companies to consider creating mechanisms to allow investors to nominate directors to appear on corporate ballots.
Comverse is the first company to adopt a proxy access provision since a federal appeals court ruled last September that the Securities and Exchange Commission improperly allowed American International Group to omit an access proposal filed by the American Federation of State, County, and Municipal Employees (AFSCME) in 2005. Since that ruling, investor advocates have filed two access proposals and urged the SEC to allow shareholders to pursue the issue at individual companies.
“The action at Comverse is a clear breakthrough as the first company that has amended their bylaws to establish a process for shareholders to nominate directors on the company proxy card,” Richard Ferlauto, director of pension benefit policy at AFSCME, told Governance Weekly.
Also this week, the SEC scheduled three roundtables on the proxy voting process for May 7, May 24, and May 25. Chairman Christopher Cox has said that the SEC will complete work on an access rule before the start of the 2008 proxy season.
Comverse announced the proxy access bylaw this week as part of a series of governance changes as the New York-based company tries to recover from a stock-option grant scandal that led to criminal charges against three former executives. The voice-mail technology firm also is facing a proxy challenge from Oliver Press Partners, which is seeking to call a special meeting and to elect two board nominees.
The new Comverse bylaw is more restrictive than the access provisions that have been proposed by AFSCME and state pension funds this season. Under Comverse’s bylaw, an investor that owns a 5 percent stake for at least two years may nominate one director to appear on the company’s proxy statement. (These ownership and time requirements are consistent with a 2003 draft SEC rule that the agency later abandoned amid corporate opposition.) The Comverse bylaw also would bar an investor from making nominations for four years if its nominee fails to receive at least 25 percent support.
By contrast, a bylaw proposed by AFSCME and three state pension funds at Hewlett-Packard called for allowing two nominations by investors who collectively own a 3 percent stake for at least two years. That binding proposal received 43 percent support in March, despite the opposition of HP management. The California Public Employees’ Retirement System has filed a similar, but non-binding, proposal that will appear on the ballot at UnitedHealth Group on May 29.
It remains to be seen whether other companies will follow Comverse’s example. Last year, investors hailed Intel’s decision to adopt a majority voting bylaw, which since has been copied by dozens of major firms. Likewise, proponents of annual advisory votes on executive pay express hope that other firms will follow the lead of Aflac, which plans to hold such a vote in 2009.
Ferlauto said Comverse’s new bylaw and the vote at HP “indicate that proxy access will be part of the corporate governance landscape going forward and puts increased pressure on the SEC to set some standards for an approach for shareholder nominations.”
Comverse is believed to be the first U.S. company to adopt a proxy access bylaw. In 2003, California-based Apria Healthcare adopted a policy to allow shareholders to submit names for inclusion on its ballot, but the company’s board can reject those candidates, according to Bloomberg News. While other firms, such as HP, allow shareholders to suggest nominees, investors have no recourse if management ignores those suggestions but to wage a costly proxy solicitation.
Shareholder Voting: Economic Perspectives – and the Power of Proxy Advisors
Last week, SEC Chief Economist Chester Spatt delivered this speech on shareholder voting and corporate governance. Here is a noteworthy excerpt:
“Some of my SEC economist colleagues and I are pursuing an academic style study of the role of proxy advisors in proxy “contests.” We focus upon contests as compared to more routine proxy votes because there is relatively more uncertainly about the outcome and therefore, relatively greater potential impact and effects associated with the recommendations.
In our sample of contests with publicly-announced advisory vote recommendations, we find evidence that recommendations lead to price responses and in particular that the market tends to assess recommendations for the dissident as relatively positive news. That there appears to be a substantial valuation impact in the marketplace at the announcement of a contest recommendation also suggests that the recommendations reflect more than just previously public information or conflicts.
In addition, our empirical evidence shows that the recommendations are good predictors of contest outcomes; for example, a recommendation that supports the dissident is a good predictor that the dissident will prevail. The findings are associated with both “influence” and “prediction” hypotheses on the role of the advisor-that the recommendation either influences or helps investors to predict the outcome, or both.”
On a somewhat related note, as reflected in this press release, global regulators are working in tandem more than ever before. One of my first speaking gigs, well over a decade ago when I was at the SEC, was at an IOSCO function. I found it’s pretty hard to get a message across when the audience comes from such a wide variety of backgrounds (different legal frameworks – and don’t forget that there are language barriers to boot) – so that these global regulatory meetings tend to stay at a pretty high level.
