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."
– where in the 10-K you intend to include the report
– whether you also will include the report in the glossy annual report, proxy statement, web page – or cross-reference from those places
– where in the glossy annual report you will include it
– whether the CEO and CFO will sign the report
– whether you will forego the statement about management’s responsibility for the financials
Please weigh in and answer the survey – and let me know if there any other items you wish to be canvassed.
Useful Examples of Internal Control Disclosures
Here are some useful examples of recent internal controls disclosures:
1. Transition Relief – Here is an example of a company – Bassett Furniture Industries – that is relying on the SEC’s exemptive order that allows accelerated filers with market caps under $700 million to have a 45 day extension for filing the 404 management report and auditor attestation.
2. M&A Exception – Here is an example of a company – Black & Decker – which used the carve-out for a recent acquisition. The carved-out entity represents $1.1 billion of B&D’s $5.5 billion in assets.
The Challenges in Setting Pay-for-Performance Goals
The media has paid a lot of attention to companies that provide incentives to executives even though the company hasn’t performed (see last week’s WSJ article about how the CEOs of the major Wall Street firms got a hefty pay raise despite lackluster stock prices). One example I have heard of relates to a CEO that has an arrangement to receive a higher salary if his options go underwater. Of course, this begs the question – what is the purpose of incentive compensation?
Setting pay-for-performance formulas are difficult, particularly since there often are unusual items that might impact benchmarks used in such formulas. Along those lines, here are some 8-Ks that disclose that bonus performance criteria were not met – but the compensation committees awarded bonuses anyway due to unusual items: Fifth Third Bancorp and Cinergy.
As these companies did, one solution for imperfect formulas is to allow the compensation committee to use its discretion in ferreting out the impact of unusual items – but the risk then arises that the committee can manipulate a formula so that payouts occur under any set of circumstances. Challenging indeed…
We have posted the transcript from our popular webcast, “Last Minute Planning for the Proxy Season.”
The SEC’s 2006 Budget
On Wednesday, the SEC posted this “Budget in Brief” analysis of its 2006 budget. But it ain’t brief – its 48 pages. Corp Fin’s piece of that pie will be approximately $100 million (down from $102 million in 2005). Corp Fin anticipates that it will review 4,720 reporting companies’ filings in 2006, which is equivalent to 38% of the reporting companies and is a 4% increase from the level it anticipates for fiscal 2005.
As always, the SEC will be a cash cow for the government, with anticipated Section 6(b) and Section 31 fees of $1.435 billion collected during 2006. The SEC doesn’t get to keep any of the money it collects. It all goes into the US Treasury – and then the Commission is at the whim of Congress to approve its budget each year.
WorldCom Judge Corrects Opinion
The WorldCom court issued a corrected opinion on February 14th on the proposed settlement of the outside directors, correcting footnote 14 on page 24 of the February 9th opinion by changing the word “only” to “not.” We have posted the corrected opinion in “Alerts” on the home page of TheCorporateCounsel.net.
Here is an excerpt from Mark Borge’s “The Compensation Disclosure Blog” on CompensationStandards.com (Mark continues to amaze with his regular analysis of recent disclosures; this particular item is more newsworthy):
Yesterday’s Wall Street Journal features an interesting article on page C1 (subscription required) about the frustrations with the current executive compensation disclosure system. The article notes how the WSJ needed to retain an actuary and an excise-tax expert to calculate the pay due to Gillette’s CEO as a result of the company’s pending merger with Proctor & Gamble. Even then, the final figure was significantly different ($12 million) from that calculated by another paper’s expert.
The author suggests that part of the problem stems from the disparate ways executive compensation information is currently reported — some in the proxy statement, some in Forms 4, and, now, some in interim filings on Form 8-K. He also notes the lack of a single location where all compensation, including retirement benefits and accumulated deferred compensation, must be reported.
The solution? He suggests that the SEC develop a separate report for disclosing executive compensation – the “Pay-K” – that would be updated throughout the year as needed. It’s an interesting idea, and certainly one that would simplify the piecemeal disclosure situation we’re now in with the new Form 8-K requirements.
Surprises Caused by Audit Confirmation Letters
Having trouble with audit confirmation letters? Get help from this interview
with Clark Fitzgerald and David Howard on Surprises Caused by Audit Confirmation Letters.
Nasdaq’s Rulemaking for Non US-Companies
Nasdaq has filed a rule change with the SEC – which will be effective around March 3rd – that would modify its rules to allow foreign private issuers to follow home country practice in lieu of certain requirements of the Nasdaq corporate governance rules without the need to seek an individual exemption from Nasdaq.
The Nasdaq rule filing states that, except for certain provisions of Rule 4350, a foreign private issuer would be allowed to rely on home country practices in lieu of the Nasdaq corporate governance requirements by providing a letter from outside counsel in that issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws and making appropriate disclosures in its annual reports filed with the SEC and, if applicable, in a registration statement.
Nasdaq also filed a proposal with the SEC that would modify its rules to require that foreign private issuers must publish semi-annual financial information in a press release or on a Form 6-K. Nasdaq proposes that the new requirement be effective for interim periods ending after January 1, 2006.
…but you didn’t know enough to ask. Interesting profile in Monday’s WSJ about SEC Chief Account Don Nicolaisen. Sounds like he is a real team player.
NY Times Dissects Rule 14a-8 Process
On Sunday, the NY Times carried this article that interviewed long-time proponent Emil Rossi. It was a one-sided article – and an unflattering portrait – of how companies use Rule 14a-8 to exclude proposals, including a blow-by-blow description of how one particular company used the procedural bases of 14a-8 to exclude a proposal.
Unfortunately, the article didn’t note how certain investors – that merely own $2000 worth of a company’s stock – can waste a whole lot of the company’s money (ie – hurt other shareholders) through submission of frivolous proposals. I agree that many companies unnecessarily fight shareholder proposals – but there is a flip side as many shareholders abuse the process too. I am in favor of raising the ownership bar so that shareholders with more of an interest can gain an audience with management and the board, and cut down on some of the more eccentric proponents that waste shareholder money.
For the many of you that have dealt with Emil in the past, the NY Times article has a photo of him and his sons, who also have been active proponents over the years. Also, here is a more detailed article on the Rossi family from a few years back.
And for die-hard fans of the gadflies, this Fort Wayne Gazette article states that Evelyn Davis was the only speaker at Disney’s annual meeting on Friday, where the crowd hissed at her. For more on Evelyn, here is last year’s Washington Post interview with her that I have posted on GreatGovernance.com.
February Installment of Carl’s Corner
I have posted the February edition of Carl’s Corner, this one dealing with sequential triggering events, tag-along and drag-along rights and restrictions on transfer in shareholder rights’ agreements.
Last Tuesday, each director on Abercrombie & Fitch’s board was sued in the Delaware Court of Chancery for waste and breach of duty of good faith and loyalty for allegedly overpaying its CEO. The directors also were sued for breach of the duty of disclosure!
The complaint appears to be solely based on the company’s 2002 Compensation Committee report in the proxy statement, which the plaintiff claims is false. Paragraph 18 of the complaint repeats the Compensation Committee report verbatim – and then Paragraph 19 cites an excerpt from the company’s 2003 proxy statement, which discusses an amended and restated employment agreement with the CEO. This complaint is posted in the “Compensation Litigation” Portal on CompensationStandards.com.
Against those disclosures, Paragraph 20 of the complaint cites a Bud Crystal article on Bloomberg.com from August 4, 2004, in which Crystal points out that the Abercrombie CEO pay was at the top of the peer group. This basically was all that the plaintiff firm needed to file the lawsuit!
The bottom line is that this is further evidence of the continuing scrutiny of compensation by the plaintiffs bar looking for the “next” Ovitz case. Learn how directors can take steps to avoid liability in our March 3rd webcast on CompensationStandards.com – “Steps to Take: How to Avoid Director Liability After WorldCom, Enron and Disney” – featuring John Olson of Gibson Dunn; Marty Lipton of Wachtell Lipton; Frank Balotti of Richards Layton; and Rich Koppes of Jones Day.
Corp Fin Focuses on Cash Flows in Letter Sent to Certain Companies
In January, Corp Fin sent letters to certain companies related to their presentation of cash receipts from inventory sales in their statements of cash flows. In order to affect wide-spread awareness of this issue – and to refocus companies on the proper presentation in their consolidated statements of cash flows – the SEC posted a copy of this letter, which includes sample comments, so that companies will consider these issues for future filings.
NYSE Updates 303 Written Affirmation Forms
Last week, the NYSE updated its 303 Written Affirmation Forms and Instructions for both US and non-US companies. The 2005 forms and instructions were updated to reflect the 303A.02(b)(iii) rule change effected on November 3, 2004, the expiration of the first year transition period and to provide expanded textual guidance for frequently asked questions. Here is a more detailed comparison between the 2005 and 2004 forms.
Corp Fin Sends Letter to Oil & Gas Companies
Recently, I received an email from a member who had noticed a number of oil companies reporting their year-end reserves in Section 2.02 of Form 8-K. Oil & gas companies have been under the gun from the SEC’s Division of Enforcement – and now the Division of Corporation Finance has posted this letter that it has sent to all oil & gas companies. The letter asks the companies to answer accounting questions in the areas of exploratory drilling, buy/sell arrangements and disposition of properties.
Last Wednesday, Judge Cote issued a 38-page Opinion in the WorldCom case, which expounds on the one-page Order she issued on February 2nd that rejected the request to approve a cap called for by the proposed settlement on the amount by which any judgment against the non-settling defendants could be reduced.
Under the proposed settlement, the settling directors would have had to pay out of their own pockets but would have avoided the risk of paying even more if they had stayed in the case. The Court’s decision did not change the amount those directors would have paid under the settlement, but would have the effect of potentially reducing the amount the plaintiffs could collect from any verdict or judgment against the non-settling defendants if the settlement became effective.
Mike Holliday notes that this Opinion explains why she denied the application for approval of the Judgment Reduction Formula in the proposed settlement insofar as the “Contribution Credit” in the Formula was adjusted to reflect any limitation on the financial capability of the Settling Directors. The February 2nd Order led to the termination of the proposed settlement by the Lead Plaintiff.
The decision is dictated by the complex interplay of provisions of the Private Securities Litigation Reform Act of 1995, in a result which the Opinion notes “will make it extraordinarily difficult for outside directors to settle Section 11 claims before all deep-pocket defendants facing joint and several liability have done so . . . .” The Opinion discusses how the PSLRA applies to settlements involving outside directors.
The proposed settlement contained a condition that the reduction of any verdict or judgment against a non-settling defendant in the action be limited to the greater of the “Settlement Credit,” the “Insurance Credit” or the “Contribution Credit.” Mike referred in my February 3rd blog to the “Settlement Credit” and the “Contribution Credit” – the “Insurance Credit” apparently was added in a revision to the original proposed settlement.
At issue here is the “Contribution Credit” – what the settling directors’ assessed proportion of the judgment would have been without the settlement but limited to what those directors would actually be capable of paying. The Court found that the proposed reduction limited to the financial capability of the settling directors violated the statue.
The two other prongs of the Reduction Formula were the “Settlement Credit,” or amount of the Settlement, of $54 million, $18 million to be paid by the settling directors and $36 million by the insurers, plus any interest; and the “Insurance Credit,” or available insurance coverage, which the Opinion concluded would be at most $85 million. It was reported that the proposed $18 million to be paid by the directors represented in excess of 20% of their cumulative net worth (excluding primary residences, retirement accounts and jointly held assets) which offers some insight into the capability of the directors to pay.
Criticism of the SEC Restitution Fund
Recently, the SEC’s restitution fund has been criticized, such as in this NY Times article from yesterday and today’s Washington Post article.
Learn How to Blog
For all of you that enjoy this blog – and the others we maintain on our sites – and wonder if blogging is for you, you may want to check out this webcast program that will be held this Thursday.
Of course, feel free to always contact me to ask questions on about how to become a blogger – as it is one that I am passionate about (and I am always looking for new talent!). If you can believe it, I am about to enter into my fourth year of blogging and it has been immensely rewarding in several different ways (see today’s NY Times article on blogging). One obvious way is that you can brand yourself in a way that would have been difficult to do before the Web; but less obvious ways include the email relationships it has fostered with so many of you. Keep the feedback coming, I appreciate it!
We have posted the transcript from the webcast: “Demystifying Internal Controls Disclosures.”
I have also posted an interview with panelist Linda Griggs of Morgan Lewis to cover some unanswered business from the webcast regarding the location, content and format of 404 reports.
Difficulties of Auditor Turnover
On Sunday, the NY Times ran this interesting article on how some smaller companies are losing their independent auditors at the eleventh hour.
One point that is not directly made in the article – but borne out by the end of it – is that a fair number of companies that lose a Big 4 auditor find another Big 4 firm to fill the void pretty quickly. Lynn Turner of Glass Lewis recently shared some statistics with me that reveal that this is the case more often than not. Of course, some companies are not able to do so and are forced to hire much smaller audit firms.
If You Thought Evelyn Davis Was Bad…
As we approach the annual meeting season – and with the continuing emphasis on corporate governance – Keith Bishop shares this amusing description of corporate governance in Japan (the translation is of “Kaishahou Nyuumon” – which means “an introduction to corporate law” – done by Keith’s daughter):
“Our country’s company managers have come to view general stockholder meetings as a necessary evil. Rather than exhausting doubts, everything is done to see that the formality is carried out quickly. Extortionists who threaten to disrupt stockholder meetings take advantage of the weak attitude of the managers. They threaten to disrupt the meetings and demand money. Managers also use extortionists to speed meetings along. In order to stop this phenomenon peculiar to our country, in a show a revision to the commercial law steps were taken to limit companies’ ability to furnish benefits in order to preserve the rights of stockholders. In particular, it attached penalties to officers and employees who provided illegal benefits.”
Yesterday, SEC Chair William Donaldson gave a lengthy interview to major newspapers. During the interview, Chairman Donaldson indicated that the proposed shareholder access framework would need to be altered before it could be adopted, as explained in this Washington Post article and NY Times article.
And, in this article, the Wall Street Journal wrote about Chairman Donaldson’s desire to push for better executive compensation disclosures, with “plans to work with the staff to find a way to make compensation disclosure more transparent and understandable.” The article also noted “beyond better disclosure, Mr. Donaldson said he also is concerned about performance measures some companies use to reward executives. In some cases, he said, officials may be getting paid to simply hit Wall Street estimates rather than actually improve a company’s long-term performance. I believe that performance should be paid and good performance should receive good pay, but there has to be a better definition of what real performance is, he said. Mr. Donaldson said he wants companies and boards to start paying closer attention to what metrics they use to determine compensation.”
Audit Committee Guide and Best Practices
In our “Audit Committee” Practice Area, we have posted this excellent 112-page Audit Committee Guide from Wachtell Lipton, complete with a number of model documents (bear in mind the July 2004 date of the Guide) – such as whistleblower procedures, pre-approval policy and audit committee charters (for both NYSE and Nasdaq companies). Thanks to David Katz!
Proxy Advisory Report on Disney
On the GreatGovernance.com home page, I have posted the 11-page report issued by the new proxy advisory firm, Proxy Governance, related to Disney’s annual meeting. For those of you that have never seen the types of reports upon which institutional investors typically make their voting decisions, this will be informative.
Although this year’s Disney annual meeting – being held tomorrow – won’t be as exciting as last year, there should be some excitement as former directors Stanley Gold and Roy Disney just announced that they will withhold votes for all directors because they believe the CEO succession process is lagging (but they don’t encourage other shareholders to withhold their votes; what is that all about?). Also, CalPERS announced it will withhold its votes from Michael Eisner, because it doesn’t think Eisner should remain on the board after he steps down as CEO in ’06.
Maybe not, but on Monday – as reported by the NY Times in this article – Corp Fin allowed the exclusion of shareholder access proposals submitted by major shareholders of Verizon, Qwest and Halliburton. This decision is consistent with Corp Fin’s final decision on a similar shareholder proposal submitted to Disney at the end of the year.
As I blogged back on December 30th, the shareholders tried to rely on footnote 74 in the SEC’s proposing release, which said that while the SEC was deliberating on final rules, shareholders could submit shareholder proposals that mirror the framework of proposed Rule 14a-11.
In the identical no-action responses sent on Monday, Corp Fin Director Alan Beller implied that the footnote (and the shareholder access proposal itself perhaps?) had become stale with his statement, “Given the passage of time since the proposal, we will not recommend enforcement action to the commission” if the companies omitted the shareholder proposals from their proxy materials. So with these letters, Corp Fin has basically reverted to the Division’s historical approach to election proposals under 14a-8(i)(8).
How to Use Governance Ratings
Learn how to use governance ratings in this interview with Gavin Anderson of GMI International. I was surprised by Gavin’s comments regarding the appetite of retail investors for governance ratings.
Yesterday, the SEC announced that it intends to hold a roundtable later this spring on internal controls. No date yet has been set. The SEC will also solicit – and post – written comments about 404.
Yesterday, the SEC’s Office of Chief Accountant posted this letter regarding how to use lease accounting in restatements, including what disclosures might be appropriate in MD&A such as:
– The accounting for leases should be clearly described in the notes to the financial statements and in the discussion of critical accounting policies in MD&A if appropriate.
– Known likely trends or uncertainties in future rent or amortization expense that could materially affect operating results or cash flows should be addressed in MD&A.
The SEC noted that the MD&A disclosures should address:
1. Material lease agreements or arrangements.
2. The essential provisions of material leases, including the original term, renewal periods, reasonably assured rent escalations, rent holidays, contingent rent, rent concessions, leasehold improvement incentives, and unusual provisions or conditions.
3. The accounting policies for leases, including the treatment of each of the above components of lease agreements.
4. The basis on which contingent rental payments are determined with specificity, not generality.
5. The amortization period of material leasehold improvements made either at the inception of the lease or during the lease term, and how the amortization period relates to the initial lease term.
Shareholder Access (And More) By Gunpoint
In the latest of a string of settlements that impose governance changes on companies, Ashland has settled a shareholder derivative lawsuit brought by the Central Laborers’ Pension FundHolders that requires the company:
– to solicit institutional shareholders who hold 1 percent or more of the company stock’s for a list of candidates to nominate as independent directors
– to make a part of its governance policy its practice of requiring at least two-thirds of its board be independent directors
– to mandate shareholder approval for the adoption of stock option plans for directors or officers, and require a holding period for a portion of shares acquired by directors and senior officers through option exercises
