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."
Looks like the NY Times also loves the “double bull” quote from Ed Woolard’s inspiring 10-minute video, as I blogged last week. From yesterday’s NY Times by Gretchen Morgenson: “While investors have railed about skyrocketing executive pay, lo these many years, the response from executive suites has been a confounding silence. Even directors, who have a fiduciary duty to put shareholders’ interests before those of managers, have been unwilling to stop the insanity.
Last year, the average pay package for chief executives at big companies came in at $10 million, up 13 percent from 2003. In view of the pension and health insurance givebacks being forced upon lower-level workers, this surge is especially obscene.
That the people on the receiving end of these enormous transfers of shareholder wealth want them to continue is no surprise. What’s-in-it-for-me is the way we live now. Still, letting excessive pay escalate every year hurts the already battered reputations of American executives. From that standpoint, the silence has been baffling.
Finally, however, a C.E.O., albeit an emeritus one, is talking tough about outrageous pay and pliant boards. In a taped speech – aimed at directors – that will be shown at a compensation conference on Oct. 31 in Chicago, Edgar S. Woolard Jr., the former chief executive of DuPont and the current chairman of the New York Stock Exchange’s compensation committee, debunks the main myths of executive pay.
Mr. Woolard, 71, does the debunking with style. He has one word, for example, to describe the notion that chief executive pay is driven by competition: “bull.” And to the idea that compensation committees are independent, he says “double bull.”
What about the doctrine that chiefs are owed stupefying amounts because they create wealth for shareholders? “A joke,” Mr. Woolard says.
“I honestly don’t understand why more C.E.O.’s aren’t concerned about the image of business leaders in general,” Mr. Woolard said in an interview. “They don’t seem to have the same perception I do that business leaders are beginning to be thought of as politicians and labor union leaders and other types of individuals who don’t have the right respect. So I’m speaking out because I would like to encourage other current C.E.O.’s to provide the leadership to begin to make the change to more rational compensation.”
For example, he said, most people do not know that compensation committees are not independent of the chief executive. He described the workings of these typically close relationships:
“The compensation committee talks to an outside consultant who has surveys that you could drive a truck through and pay anything you want to pay, to be perfectly honest,” Mr. Woolard says. “The outside consultant talks to the H.R. vice president, who talks to the C.E.O. The C.E.O. says what he’d like to receive. It gets to the H.R. person who tells the outside consultant. And it pretty well works out that the C.E.O. gets what he’s implied he thinks he deserves, so he will be respected by his peers.”
Mr. Woolard said directors should solve this problem by barring compensation consultants from discussing pay with anyone inside the company. Rather, the consultant should offer pay ideas to the company’s compensation committee, which should discuss the matter only with human resources people. “At the New York Stock Exchange our outside consultants do not get any comments or sense of direction from the C.E.O. or H.R. person,” he said.
While executives often contend that their pay is driven by competition, Mr. Woolard counters that the outside consultants are in control. If the consultants want to be rehired in future years, they will not want to hurt their chances by suggesting that a chief receive less than his or her peers do.
“Boards have been led to accept the logic that if ‘our C.E.O.’ is not in the top half, it implies to employees and to the general public that the board may not have confidence in the C.E.O.,” Mr. Woolard said in the interview. “For some crazy reason it’s been translated to, ‘If you paid me at the bottom quartile, people would think you’re about to get rid of me.’ All that is honed by these outside consultants; they’ve gotten rich by providing this framework and the logic of the top quartile, and the boards have accepted it.”
A solution, Mr. Woolard said, is a strategy known as internal pay equity, which he put into practice at DuPont in 1989. It starts with an examination of the average pay given to the handful of senior managers running a company’s divisions; the chief executive’s compensation is then based on a premium set to those pay levels.
“We took the level of the senior v.p.’s, the people who make very major decisions about the businesses underneath them,” Mr. Woolard recalled. “And we asked the outside consultant to make a survey of how other companies pay people at that level, which is not escalating greatly. Then we put a cap on the C.E.O.’s total compensation not exceeding 50 percent of that.” The chief executive, therefore, is taken out of the peer-group horse race that propels pay into the stratosphere.
Finally, Mr. Woolard knocks down the notion that chief executives deserve their riches because of the shareholder wealth they have created.
“During the 1990’s with the stock market bubble and the major temporary wealth created for shareholders, this philosophy that ‘I am doing so great for my shareholders, I certainly deserve a fairly significant portion of the benefit,’ permeated across companies and boards,” Mr. Woolard said. “Now, my concern is that the stock market bubble burst and many shares declined significantly but the base of C.E.O. compensation that was built during that artificial period is a base that is still used today. Because the surveys of the outside consultants are primarily built on compensation for the last five years, there’s no way for those surveys to decline.”
In other words, a lot of these emperors have no clothes.
Jesse M. Brill, a securities lawyer who is chairman of the National Association of Stock Plan Professionals, a sponsor of the Chicago conference, said the video of Mr. Woolard’s speech should be required viewing in every public company’s boardroom. Mere mortals can view it, too.
“It all goes back to accepting that this is a significant problem,” Mr. Woolard said, “and thinking very carefully about it at the compensation committee and the board, and not allowing the C.E.O. to have any input into the process.”
Won’t it be interesting to see if any of Mr. Woolard’s peers join him in battling chief executive greed or if directors start to take up this fight? It would be a shame if the silence from the corner office just continued.”
This should only support Mr. Woolard’s contention that CEOs are not held up so highly anymore – here is a recent article that details how a CEO disputes the $240,000 ran up on his corporate credit card for attending a topless club. The CEO says it was only $20,000. Wonder if that will make it into the company’s proxy statement as perk disclosure…
The “2nd Annual Executive Compensation Conference” will open with a videotaped panel on director duties and liabilities featuring Delaware Supreme Court Chief Justice Myron Steele; Delaware Vice Chancellor Stephen Lamb; and Professor Charles Elson, Director of the U. of Delaware Center for Corporate Governance
Here is a teaser of just a few of the many issues that will be addressed by this panel:
– Meaning of the Disney opinion – “The opinion should be read as a warning signal rather than a free pass.”
– Hiring compensation consultants – “If you interview a compensation consultant and all they bring to the table are benchmarking surveys to establish a pay package – I would be very leery.”
– Reliance on experts – “Simple reliance on the comp consultant I don’t think gets you there. You’ve got to go beyond that.”
– Director independence – “I think if you have a charitable link to the company or to the manager of the company, it does influence your thinking”
– Minute-taking and board materials – “What’s important to note in the minutes – if there’s a dissenting opinion, I think the dissenting opinion needs to be recognized.
With one week to go, act now to register to attend in Chicago or by video webcast.
Implementing a Majority Vote Governance Guideline
Watched a rousing panel on the majority vote movement at ISS’ Annual Conference yesterday – so far this year, shareholder proposals on this topic have averaged support of 44%, a high level for a “first run” type of proposal. If you haven’t been following developments – and the arguments involved – it’s time to get up-to-speed. Here is an ISS article on how the access rule might have crawled out of the grave.
Recently, Microsoft joined the growing list of companies to adopt some form of voluntary governance guideline pertaining to the majority vote standard. In this podcast, John Seethoff, Vice President and Deputy General Counsel of Microsoft Corporation, explains how to implement a corporate governance guideline regarding the tender of a resignation from a director that receives a majority of votes withheld, including:
– What exactly did Microsoft do? And why?
– Under what circumstances do you think a board might exercise its judgment not to accept a director’s tender?
– In what form would you expect directors to tender their resignation under this type of guideline?
– Do you think the tender of a resignation would trigger a Form 8-K filing?
– What do you recommend that the rest of us do to become educated and more involved regarding the majority vote movement?
Buried in yesterday’s WSJ (and not available electronically), it was reported that the NYSE is considering “branding” listing companies that violate the NYSE’s governance standards, perhaps using a flag added to the stock symbols of the companies in violation (akin to the “lf” flag now used for companies that file their periodic reports late).
The article also notes that the NYSE is considering amending its standards to clarify the disclosure requirements regarding director independence due to a “wide range of differences in the disclosures” provided by listed companies to date. We first flagged this issue back in June.
FASB Issues Staff Position on Option Grant Date Issue
On Tuesday, the FASB issued FAS 123(R)-2 which recognizes the board/committee decision date as the grant date if the grant is unilateral and is communicated within a short period of time. Here is a blog with background on this issue.
Internal Controls Update: The Big 4 Speak
We have posted the transcript from our recent webcast: “Internal Controls Update: The Big 4 Speak.”
If you think absurb results only occur in the corporate & securities world, look at the recent decision by the Patent Office in Ex parte Lundgren, overturning a patent examiner’s rejection of a patent claim to a “method of compensating a manager ….” Learn more about this case in the Conglomerate Blog.
Long Live SARs!
When they came out at the end of September, Julie blogged about the proposed IRS regulations regarding implementation of Section 409A of the Internal Revenue Code (as enacted in last year’s deferred compensation legislation). Mike Melbinger has blogged multiple times about various aspects of this topic in his blog.
Let me focus a little more on how SARs are proposed to be treated – the proposed regulations exempt all SARs from Section 409A so long as the exercise price of the SAR is not less than the fair market value of the underlying shares on the date the SAR is granted. This change should make SARs more attractive, particularly since 123(R) will value SARs in much the same manner as stock options for purposes of determining an employer’s compensation expense. The bottom line is that stock-settled SARs now offer many advantages to companies and, under FAS 123(R), are an attractive alternative to stock options.
A number of members have asked if we have posted law firm memos on the proposed IRS regulations. We have hordes of them in Section E.29 of our “Law Firm Memos.”
Lots of news lately about the relationships between analysts and the companies they cover. For example, it was widely reported last month that the SEC was looking into Altera Corporation and its alleged retaliation against an analyst.
Maybe I am missing something, but I think the SEC might need to create new rules here – because the potential cause of action is not clear to me as companies aren’t obligated answer questions from everyone who calls. I understand why retaliation doesn’t seem fair to analysts or good for investors – I just don’t see the legal basis for an enforcement action under the existing regulatory framework.
How about the story a few weeks back about how Cyberonics’ CEO objected to the hiring of some students by an analyst to crash an invitation-only video conference meeting during which the company’s new medical devices were discussed, as fleshed out in a September 7th WSJ article. I can understand how this could be irksome to a company due to the misrepresentation involved. On the other hand, this seems to be the type of soft research that the SEC encouraged when it adopted Regulation FD.
Along these lines, check out the website for the Gerson Lehrman Group. This summer, this site made the news due to this August article in the Seattle Times, which detailed how doctors involved in confidential studies were hired to leak results for the benefit of hedge funds and other clients. Here is a rebuttal to the Seattle Times piece from the Gerson Lehrman Group.
Don’t assume that your employees would laugh at the side money offered by groups like Gerson Lehrman. Despite the fact that your research people might have signed confidentiality agreements, I have spoken to more than a few companies whose employees didn’t realize that they weren’t allowed to communicate with the outside world about their studies. As part of the company’s compliance culture, it certainly makes sense to periodically remind them that such side arrangements would violate their employment conditions, etc.
Pleathora of Sarbanes-Oxley Articles
Yesterday, the WSJ carried a spection section on “Living with Sarbanes-Oxley,” including this article on “governance by gunpoint” with a quote from yours truly.
Winning Strategies in Auctions
We have posted the transcript from the DealLawyers.com webcast: “Winning Strategies in Auctions.”
Also on DealLawyers.com, in this podcast, George Casey of Shearman & Sterling discusses the SEC’s Divisions of Corporation Finance and Market Regulation jointly issued no-action and exemptive letter to Axel Springer providing relief under the tender offer rules (Axel Springer, a German stock corporation, made a cash tender offer for another German company), in particular focusing on the following questions:
– What is the significance of the SEC giving a cross-border relief in connection with an offer for a company that does not qualify as a “foreign private issuer”?
– It appears that the bidder would be permitted to pay for the tendered shares with a significant delay after the expiration of the offer period. Why was this relief necessary?
– Is the “prompt payment” relief likely to become recurring in German offers?
– The bidder will give withdrawal rights after the expiration of the offer. Why is this necessary?
Are You the MOH in Your Office?
Today’s Dilbert reminded me of the hilarious skit at yesterday’s Association of Corporate Counsel Annual Conference about widespread persecution of the “male office honey.”
Starting this Thursday, Google will begin providing pro forma numbers in their quarterly earnings releases. See their blog for the rather dumbed-down announcement (you might ask, how many companies have corporate blogs yet? answer is “not many”).
Google’s Chief Accountant indicates that the company will be providing a “non-GAAP, diluted earnings per share number” that excludes the effects of stock option expensing. (Google laid the groundwork for complying with Regulation G by mentioning that management reviews non-GAAP results when analyzing performance – but it will be interesting to see management explain how it uses the non-GAAP diluted EPS number in managing the business!)
Interestingly, Google notes that its non-GAAP numbers may nonetheless differ from the numbers that analysts present when they exclude the effects of expensing options – because Google will be presenting their non-GAAP calculation on an after-tax basis.
Another interesting aspect of Google’s “plain English” explanation of its non-GAAP adjustments is that the company did not address the fact that once a company is applying FAS 123(R), the number of shares outstanding on a fully diluted basis also will be different than the calculation pre-123(R). Thus, it will be interesting to see if Google’s disclosures do not fully back-out all of the effects of 123(R) – or whether they will be providing additional disclosure about how 123(R) affects the diluted share calculation.
The issue arises because under the treasury stock method of calculating fully diluted shares, the amount that is deemed to be applied to repurchase shares when all in-the-money options are exercised will have a different calculation for the assumed tax benefit from those deemed exercises – and will include an additional element not currently taken into account (ie. unamortized deferred stock compensation). This just further highlights Google’s point that any non-GAAP numbers given by companies will likely differ from what the analysts would give – not only would the analysts not have the tax effect numbers, but they may not have the fully diluted share effect numbers.
It just goes to show how this stuff is quite complex – and it reinforces why lawyers need to fully understand this dramatic new accounting change to be sure that disclosures are accurate. As I blogged last week, the upcoming NASPP conference will have 8 panels that will be addressing 123(R), including an address by FASB Chair Bob Herz on the topic. If you can’t make it to the Conference, you can now order a CD-Rom of the Stock Option Expensing Toolkit that includes an archive of all those panels and much more.
Binding Majority Vote Proposal Fails at Paychex
Last week, Paychex shareholders overwhelming – about 80% – voted against the first binding bylaw amendment proposal seeking a majority voting standard for director elections (see this background info). This AFSCME proposal received less shareholder support than the non-binding majority election proposals that appeared on ballots this year – at nearly the 60 meetings where this issue was considered so far this year, the average level of shareholder support averaged 44% of the votes cast. I don’t think this low level of support will deter more binding bylaw amendment proposals, but it likely won’t prompt a mad dash to submit more.
On September 30th, the NYSE filed a proposed change to the NYSE Listed Company Manual with the SEC that would eliminate Section 203.01’s requirement that listed companies physically distribute annual reports to shareholders – so long as they make the Form 10-Ks (or 20-Fs/40-Fs) available through their websites instead. Under the proposal, companies would have to offer – via a prominent plain English undertaking – to deliver paper copies, free of charge, to any shareholders who so request. [Check out footnote 1 of the proposal – the delivery requirement can be traced back to 1895!]
Standing alone, this proposal doesn’t mean much for US companies so long as the SEC’s Rule 14a-3(b) continues to require delivery of an annual report, along with the proxy statement, in advance of shareholder meetings. But the NYSE’s proposal is a big deal for foreign private issuers who are exempt from the proxy rules (and who now are often required to mail two annual reports each year – one to comply with home country rules and one to comply with the NYSE’s requirement).
Don’t be surprised if the SEC follows the NYSE’s lead here and moves to an access model for proxy delivery – those cost savings sure would be welcome for many companies to help offset their new 404 costs.
Getting Ready to Transition Your Shelf
I continue to highlight timely and useful law firm memos in the “Hot Box” on the home page – the latest is this 34-page memo from Sullivan & Cromwell that includes a healthy discussion about what you should be doing now with your existing shelf offerings. It’s a nice companion to the ’33 Act reform transition webcast we held recently – and the numerous other law firm memos we have posted on the topic.
SOX Opens the Door for More O&D Bars
From Bruce Carton’s Securities Litigation Blog: For years, a threshold requirement for the SEC to obtain the equitable remedy of an officer and director bar against a defendant in one of its cases was an underlying fraud charge under Section 10(b). As stated in Section 21(d)(2) of the Exchange Act, a court has the authority to “prohibit, conditionally or unconditionally, and permanently or for such period of time as it shall determine, any person who violated section 10(b) or the rules or regulations thereunder…”
So historically, in a case like the recently settled enforcement action against David Michael, former director and chair of the audit committee of Del Global Technologies Corp., Inc., in which the SEC charged Michael only with violations of the books and records, internal controls, and lying-to-auditors provisions of Section 13 of the Exchange Act, no O&D bar would have been possible.
The Sarbanes-Oxley Act of 2002 changed this, however. Section 305 of SOX amends Section 21(d) by adding a new Section 21(d)(5): ” 5. Equitable Relief -In any action or proceeding brought or instituted by the Commission under any provision of the securities laws, the Commission may seek, and any Federal court may grant, any equitable relief that may be appropriate or necessary for the benefit of investors.”
The end result? Despite the absence of any fraud charge against David Michael, the SEC’s settlement provided for a final judgment that, among other things, permanently bars Michael, pursuant to Exchange Act Section 21(d)(5), from serving as an officer or director of a public company.
On the Lighter Side
Been a while since I showed my personal side. Excited about the White Sox! Grew up in Cubs country on the north side of Chicago but worked for the Sox in 1983 when I was in college. Part of my job was to ensure the network ran the right commercials and the announcers gave the appropriate plugs – so I never could go to the bathroom when watching a game unless a buddy watched with me. Talk about perils on the job! The Sox hosted the 50th anniversary all-star game that year and I met a bunch of Hall-of-Famers.
Recently saw the movie “In Her Shoes” – a very good flick. Reminded me a lot of “Terms of Endearment” and not just because Shirley MacLaine starred in both. Not that I see too many movies, but I am pretty selective and the only movie I saw this year that was better was little known “Off the Map” starring Joan Allen and Sam Elliott. That was a classic!
What might be the latest sleeper issue? Check out the just mailed Sept-Oct issue of The Corporate Executive – as well as this interview with Steve Quinlivan and Jeff Cotter on Option Expensing Disclosures. SAB 107 is gonna shake up MD&A soon enough, very soon for some companies.
Some folks are “on” this issue – many of them are attending this year’s NASPP Annual Conference in early November, as that conference includes 8 panels on expensing as well as an address by FASB Chair Bob Herz on the topic.
But who knows, maybe they are attending to catch the Hootie & the Blowfish show at the House of Blues that comes part and parcel with the conference – I sure could use a little fun and wish all legal conferences had some entertainment…
Want to Understand Hedge Fund Activism?
It seems like there is an article cada dia about hedge fund activism in the papers – here is yesterday’s WSJ article on the topic. Tuesday’s DealLawyers.com webcast on “The Convergence of Hedge Funds and Its Impact on M&A” was superb and went 15 minutes long (and it could have gone another two hours to be honest).
With MacKenzie Partners CEO Dan Burch joining the panel at the last minute – and Dan is involved with many of the hedge fund takeover battles raging these days – the panel imparted much knowledge about who the players are; what do they want – and what it means for companies that don’t want their boat to be rocked. I blogged more about this webcast on the DealLawyers.com Blog.
Get access to the audio archive of the webcast – and all the other content on DealLawyers – by entering a no-risk trial for 2006 today. A single license is only $195!
US Supreme Court Denies Certiorari in Gemstar Appeal
On Tuesday, the U.S. Supreme Court denied certiorari in the Gemstar-TV Guide appeal, thereby giving a boost to the SEC’s power to freeze payments to executives during investigations of possible securities law violations.
The decision confirms the SEC’s authority to prevent companies from paying extraordinary amounts to officers and directors who are under investigation by the SEC – and severance and indemnification arrangement should now come under greater scrutiny.
As Delphi Corporation prepared to file for bankruptcy last week, the company first increased the severance pay for 21 of its top executives from 12 months of pay to 18 months, plus variances in the severance formula – see this Form 8-K (yesterday’s WSJ also discussed how executives were offered as much as 10% of the restructured company and $90 million in bonuses – but I’m not sure where those details emanate from). All in all, it seems like a textbook example of pay-for-nonperformance!
At the same time it increased the potential severance payouts to its senior managers, the company was telling employees that it needed to cut their pay by more than 60% as well as reduce their health care and retirement benefits.
Here is an excerpt from a Detroit Free Press article: “Patrick Keenan, a law professor at the University of Detroit Mercy, said rich severance packages are difficult for workers to swallow when they are being asked to sacrifice for the company. “The idea is to keep the company’s top executives, but there’s something borderline immoral about these golden parachutes,” he said.” An even stronger statement came from the United Auto Workers union – and here is an interesting editorial.
Here is an answer to a trivia question – according to one study, Nevada ranks fourth among the states when it comes to the number of publicly traded companies (after Delaware, California and New York) and third in all companies going public from 1996-2000. Who would have thunk it?
Thus, I was surprised to recently learn that the Toronto Stock Exchange has decided that corporations incorporated in Nevada are not eligible for listing on the Exchange. The only other jurisdictions that have landed on this proscribed list are the British Virgin Islands and Turks & Cacaos. Look for a full court press from Nevada to get itself taken off this short list.
CII’s New Policy on Director Compensation
One item arising out of the recent annual Council of Institutional Investors conference was a new director compensation policy. Here are some key components of this new policy:
– Only Two Components of Director Pay – director pay should include only cash and equity with some noteworthy exclusions.
– Meeting Fees – CII opposes meeting attendance fees because meeting attendance is the most basic expectation of a director.
– More Pay for More Responsibilities – CII believes retainer fees may be differentiated to recognize that independent board chairs, independent lead directors, committee chairs or members of certain committees are expected to spend more time on board duties than others.
– Equity Holding Periods and Ownership Guidelines – CII believes equity pay should include an ownership requirement (at least 3-5x annual comp) and a minimum hold-til-retirement requirement (at least 80% of equity grants).
– No Perks and No Pay-for-Performance – CII’s policies specify directors should not receive performance-based compensation nor any perks (aside from meeting-related expenses such as airfare, hotel accommodations and modest travel/accident insurance) or change-in-control or severance payments.
– Disgorgement for Malfeasance – CII’s policies support disgorgement, saying directors should be required to repay compensation to the company in the event of malfeasance or a breach of fiduciary duty involving the director.
– Comp Committee’s Role in Setting Director Pay – CII believes the comp committee should understand and value each component of the compensation and annually review the sum potentially payable to each director and be allowed to retain an independent compensation consultant to assist in the evaluation of director pay packages (with a summary of the consultant’s advice disclosed in the proxy statement).
– Proxy Disclosure about Director Pay – Companies should include a table with columns valuing each component of compensation paid to each director during the previous year; another column in the table should show an estimate of the total value, including the present value of equity awards, of each director’s annual pay package and other relevant information; and a third column should indicate the number of board meetings and committee meetings attended by each director. In addition, philosophy for director pay and the processes for setting pay levels should be disclosed (including fleshing out peer group comparisons) – as well as how many committee meetings involved discussions about director pay, and any reasons for changes in director compensation programs.
In addition, the CII recently updated this “spectrum of activism” white paper, which lists 22 actions that investors can take to “reduce risk in their portfolio and enhance performance.” And here is CII’s new 2005 Focus List.
Ever have one of those career highlight moments and fully recognize it at the time? Last week, I had one of those moments when I met Ed Woolard – former DuPont CEO and current Chair of the NYSE comp committee – and witnessed the taping of his remarks on executive pay. Hey, you gotta love anyone that says “double bull”!
On CompensationStandards.com, we have posted the 10-minute video of Mr. Woolard’s remarks – for free – to keep the momentum going for implementing internal pay equity and tackling the other issues addressed by Mr. Woolard. The video might take a minute to download – please urge any others you know, including directors, to watch this inspiring commentary.
By the way, internal pay equity was addressed in the Sunday NY Times’ column, “Companies Not Behaving Badly.” We have many more examples of responsible pay practices in “CEOs That Have Set An Example” on CompensationStandards.com.
NYSE’s Factors in Determining Enforcement Sanctions
Yesterday, the NYSE posted this Information Memo which lists factors considered when the NYSE decides to levy sanctions in an enforcement proceeding. I have added this memo to the “SEC Enforcement” Practice Area.
