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."
We have upgraded our list of links to corporate governance web pages by adding links to each of the Fortune 100 as well as the 20 companies with the most widely held stocks (these are in addition to the list we previously had to misc. companies that had upgraded their sites early). Also note that we have provided a list of links to the IR web pages for each of these companies.
Interestingly, roughly 85% of the Fortune 100 have already launched corporate governance web pages. However, there are no assurances that they all meet the new SRO standards.
Watch Out for SOX Scams!
Some community members have forwarded fraudulent invoices from an organization claiming to be the “Sarbanes-Oxley Compliance Registry.” These invoices are sent to the accounting departments of companies with a notice that registration fees are now due (for relatively minimal amounts, such as $125) and claim the fees are required by SOX. These scam artists are hoping the accounting department pays without asking someone within the company that knows better. If you are aware of other SOX scams, send them on!
Senate Finance Committee Approves Bill Containing CEO Certifications for Tax Returns
Last week, the Senate Finance Committee approved a bill that would require CEO to provide a certification with the company’s tax return.
We will be posting notes from this popular conference in the next day or two. One item that had the audience talking was the remarks from SEC Enforcement Director Steve Cutler. Steve stated that he was concerned about the granting of options at a time when a company was aware of a potentially positive event that had not yet been publicly disclosed. He acknowledged that this did not violate insider trading laws; rather it raised disclosure issues.
The audience asked questions but Steve was unable to provide much guidance – so this is an issue to watch (since it was unclear if Steve realized that options normally are granted before disclosure about them is made). For example, one question was if a preventive cure could be a set date for option grants arranged in advance. The answer was “no,” because this was not an insider trading issue and thus could not be cured with a Rule 10b5-1 plan for granting options.
SEC Continues in Growth Mode
Yesterday, the SEC released its request to Congress for its 2005 budget – $913 million (which includes $20 mm owed from last year). This amount is 12.5% above the amount recently received by the SEC for fiscal 2004. This budget request – the first crafted by Chairman Donaldson since his arrival in February 2003 – would permit the SEC to hire 106 new employees and is double the SEC’s 2002 budget. Good thing the SEC will be moving into a new building in a year or so…
It’s been nearly a year since the SEC went about rulemaking regarding mandatory e-filing of Section 16 reports. In anticipation of mandatory filing, many companies filed a Form ID for their insiders to enable them to file on their behalf.
Because passwords expire after 12 months, it is time for many of these insiders to renew their passwords. Since it is easy to renew before they expire – and not so easy to renew after they expire – I encourage you to renew them now. Alan Dye tells me that you can renew passwords on the SEC’s website before they expire – once a password expires, you have to file an amended Form ID to get a new one.
Interestingly, most compliance people don’t update insiders’ passwords, only their own. This is because you need only one password to get into the SEC’s system – after that, you can file using anyone’s codes. As a precautionary measure, however, you might want to renew all your insider’s passwords.
Thomson Financial on a Roll
Last week, Thomson Financial bought both CCBN – the leading IR Web page provider – and Glasser LegalWorks. Thomson also owns WestLaw and a number of other legal/corporate providers.
As predicted by Broc, the NYSE yesterday posted on its website a set of FAQs on the new corporate governance rules in Section 303A of its listed company manual. There are 51 FAQs (up from the 47 predicted).
Companies Choosy About Their Auditors
According to ratings and analysis service Auditor-Trak, in 2003 each of the Big 4 accounting firms lost more public company audit clients than it acquired. Smaller national firms — Grant Thornton, BDO Seidman and McGladrey & Pullen — collectively acquired 21% of the clients lost by their Big Four competitors. Perhaps more interestingly, 34% of the public companies that formerly used a Big Four auditor and made a change opted for a regional or local firm as a replacement. Any firm auditing public companies must register with the PCAOB of course; it would appear that perhaps the early claims that this requirement would lead to a further constriction of the universe of public auditors might have been off the mark.
Complying with SOX 404
There has been continued murmurings that the SEC will postpone the effectiveness of its new rules requiring management to report on its assessment of the company’s internal controls (see Broc’s Blog from January 14) but a recent survey conducted by PricewaterhouseCoopers found that a majority of companies are working earnestly to be prepared to comply on time. PwC reports that fully 95% of executives say that they expect their companies to meet the deadline for compliance with Section 404 but almost half admit that it will be hard to do.
It’s a Small World
And the themes underpinning Sarbanes-Oxley continue to resonate throughout. On Wednesday, a number of policy makers, business leaders, investors and other experts operating under the umbrella of the Latin American Roundtable on Corporate Governance issued its white paper on that topic. The Organisation for Economic Cooperating and Development, one of the groups working on the white paper, summarizes some of the key action items as “taking voting rights seriously; treating shareholders fairly during changes in corporate control and de-listings; insuring the integrity of financial reporting and improving disclosure; developing effective boards of directors; improving the quality, effectiveness and predictability of the legal and regulatory framework; and continuing regional co-operation.”
Meanwhile, the Financial Services Authority of Britain continues to keep up the pressure in Europe, having just levied its largest fine ever against a financial advisory firm for compliance failures. The fine, which was equal to almost one and a half million dollars, was assessed against a unit of Deloitte & Touche for failures related to its investment trust sales and other pension work.
Check out the new proxy statement from Hewlett-Packard – which includes lots of information in response to the new SRO requirements. Walt Disney also recently filed its proxy statement (see yesterday’s NY Times for an article about the SEC’s investigation into Disney’s lack of disclosure regarding related parties).
I got some feedback on my blog yesterday about “direct” communications with directors and amended my entry slightly to indicate that officers, such as the corporate secretary, may indeed be appropriate “middlemen” between non-management directors and shareholders. Fortunately, this guessing game should soon be over as I hear rumors of 47 FAQs to be released shortly by the NYSE staff on their new governance listing standards.
As reflected in my amended entry, I have seen no written guidance saying the administration has to be by a “non-management employee.” In the SEC’s adopting release regarding shareholder/director communcations, the SEC noted that the company does not have to disclose who is handling the communications nor is a company required to describe the process. Nor does the SEC specify that the person has to be a non-management employee – instead, the SEC stated that “a company’s process for collecting and organizing security holder communications, as well as similar or related activities, need not be disclosed, provided that the company’s process is approved by a majority of the independent directors.” See the SEC’s commentary on this at footnote 118 and at footnote 59. [If you are looking for samples of what companies are disclosing about how investors can contact shareholders, we have them in our “Shareholder Access Portal”]
One of the more complicated rulemakings in some time is SFAS 150 – even the effective date(s) are complicated. Under SFAS 150, an issuer must, in most circumstances, classify as a liability – not as equity – a financial instrument that falls into any of three specified categories. In certain circumstances, that could result in a freestanding financial instrument indexed to the issuer’s stock price.
NYSE’s Requirement to Communicate “Directly” with Independent Directors
I have been getting asked a lot of questions about the NYSE’s new requirement under Section 303A.03 that listed companies disclose a method for interested parties to “communicate directly with the presiding director or with non-management directors as a group.” The most common question is what is meant by “directly.”
From what I hear, the NYSE staff has been saying that a company doesn’t need to provide direct access to directors nor is it required to hire a third party. Rather, a non-management employee can undertake this task (it is unclear as to what constitutes a “non-management employee” – my guess is that it can be the corporate secretary or someone in the legal department – perhaps even if they are considered an officer).
However, this employee must be instructed from the non-management directors regarding what, when and how the directors want to review any communications. In other words, this employee can’t make any independent decisions (and of course, can’t share any communications with management unless instructed to do so by these directors). Obviously, it is wise to obtain these instructions in writing as part of a sound compliance program (and as CYA for the employee tapped as the “go-between”).
New Binding Bylaw Amendment Proposal to Create Shareholder Committee
The IRRC reports that AFSCME has submitted a binding bylaw proposal to Eastman Kodak that would create a “majority vote shareholder committee.” The proposal seeks – following a majority vote that is not adopted by the company – the creation of a committee comprised of the proposal’s proponents and other interested shareholders to communicate with the board regarding the proposal that got the majority vote.
Kodak has received majority votes on non-binding shareholder proposals for a number of consecutive years. Note that a similar type of proposal submitted to Kroger last year received the support of 47% of the votes cast.
First Credit Rating Agency Announces the Use of CGQ
Last week, Fitch announced that it will pay ISS to use its CGQ database as part of its creditworthiness assessment.
This is significant for ISS as all of the various rating agencies have been wooing the rating agencies for their business for quite some time. As to how much CGQ will mean to Fitch’s overall analysis, that remains to be seen.
Clean-Up on Sample D&O Questionnaire for NYSE Companies
We have done a little clean-up on the first sample D&O questionnaire for NYSE companies that is posted in our “Sample D&O Questionnaires.” This word file has been revised to remove the question as to whether the person has participated in the preparation of the financial statements of the Company or any current subsidiary of the Company at any time during the past three (3) years (this applies to Nasdaq companies; not NYSE companies). In addition, there is a new question dealing specifically with relationships with charitable organizations.
Following up on the superb analysis on SRO certifications in the Jan-Feb issue of The Corporate Counsel – which had just left the printers and should be in your mailbox very soon – Nasdaq just posted a Form of Corporate Governance Certification to be used by listed companies to certify as to a number of matters as required by its new governance rules.
This certification is not required by any single Nasdaq rule; rather it serves to address a number of rule requirements, including the nature of the audit committee’s composition; adoption of the requisite audit committee and nominating committee charters; that the board has executive sessions for its independent directors; and that the company has – or will have – adopted a code of conduct.
Nasdaq-listed companies must file this certification with Nasdaq’s Listed Qualification Department immediately following the company’s next annual meeting after January 15, 2004, but no later than October 31, 2004 (foreign private issuers and small business companies have until July 31, 2005).
Alan Dye’s Section 16 Transcript is Up!
Members of the NASPP or Section16.net can access the transcript from the annual webcast that Alan Dye held recently regarding the latest developments on Section 16. Always an incredibly popular program – now in its 12th year – the transcript covers 36 distinct topics!
For TheCorporateCounsel.net members, we have posted the transcript from our “50 Nuggets in 50 Minutes II” webcast featuring Alan Dye and myself.
Categorical Standards for Director Independence
As discussed during the webcast, the topic for which I currently am getting the most questions involve categorical standards for director independence. Under new Section 303A.02(a) from the NYSE Listed Company Manual, listed companies must disclose that each independent director has no material relationships with the company – and the basis for any determination regarding any immaterial relationships. Alternatively, companies can disclose that they have adopted categorical standards to assist them in making independence determinations and make a general disclosure that the independent directors satisfy them.
Even though the new NYSE standards are not technically applicable yet, some of the NYSE companies that recently have filed proxy statements have addressed director independence determinations in their disclosure – and I have compiled these samples in “Determination of Director Independence” in our “Disclosure Analysis & Samples” Practice Area.
These samples also include Nasdaq companies, who must simply identify which directors are independent under Rule 4200 (this rule technically is applicable to these proxy statements – as the NYSE and Nasdaq have split as to effective dates of its new standards).
Probably the most controversial aspect of the proposals is to require that at least 75% of a fund’s board be independent directors – and that the fund board chairman be an independent director.
