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."
This MarketWatch article has some great tips for writing an earnings releases that should help drafters. Here’s an excerpt:
Do a full earnings release
First, something basic: Investor-friendly companies always do a full press release that includes detailed financial tables, distributing it through a newswire that ensures fast distribution to all the major financial news and information publishers. Increasingly, companies are releasing truncated versions and linking to their websites for the rest. We’d prefer not to search multiple places for information when time is of the essence, and we’ve seen companies’ websites drag when thousands of investors are trying to reach them at the same time.
Many companies still do this. Department store chain Kohl’s Corp. produced one of the season’s cleanest, easiest-to-follow releases — and we thanked them for it.
Advancement of Legal Fees: Most Expansive of Conflicting Provisions Likely to Prevail
As noted in this Simpson Thacher memo, companies typically include mandatory advancement provisions in their bylaws – but they may also sign indemnification agreements with individual officers & directors that contain advancement provisions. If the advancement rights provided in each of these documents differ in scope, a question can arise as to whether the two documents should be read together or separately. The Delaware Court of Chancery – in Narayanan v. Sutherland Global Holdings – recently addressed this issue in a case involving an indemnification agreement that contained a condition precedent to the director’s right to be indemnified or to receive expense advances. That condition precedent was not, however, found in the indemnification provisions of the company’s bylaws. The Delaware Chancery held that, absent evidence of intent to the contrary, each document conferring advancement rights is a separate and independent source of advancement rights.
The Sutherland decision has practical implications. The decision highlights that – unless there is evidence suggesting contrary intent – Delaware courts will likely apply the most expansive among conflicting advancement provisions. So when drafting indemnification agreements, bear in mind that a more restrictive or conditional right to advancement than that provided in the company’s bylaws is unlikely to be enforced in the face of broader rights set forth in another instrument. You should ensure that the scope of all potential sources of indemnification-related rights are aligned – and if you wish to create an enforceable right to advancement that is narrower than that contained in the company’s bylaws, you must ensure that the indemnification agreement unambiguously expresses the intent of the parties that the agreement operate in conjunction with the company’s bylaws. Hat tip to Simpson Thacher’s Yafit Cohn for this!
Escheatment: Pennsylvania, Massachusetts & Arkansas Join the Fray
A recent question in our “Q&A Forum” (#8863) highlights how states other than Delaware are getting aggressive in the escheatment area. Here’s part of the answer to that query – thanks to Reed Smith’s Diane Green-Kelly for her expertise (also see our “Escheatment Handbook“):
It is important that each company consult with counsel on the degree of authority to provide to the transfer agent and the manner in which records are made available. It is important, as well, that in the end of the audit if shares are deemed abandoned, the test for last contact precisely fit the particular state’s definitions. Each state has a slightly different standard, and a company can become at risk for a claim of negligent escheat if shares are escheated prematurely.
Kelmar takes a “one size fits all” approach in these audits, which is incorrect. A number of companies have had to save shares from escheat in a number of equity audits by Kelmar because of this incorrect interpretation of the law.
You should consult with counsel who are familiar with these audits. For a few thousand dollars in legal advice, you can save yourself from considerable liability and headaches.
While spending time out in Berkeley for my oldest son’s graduation from Cal back in May, I was reminded that this truly could be the year that virtual reality starts to go mainstream. The Oculus Rift was released earlier this year. Late last year, the NY Times gave away 1.2 million sets of Google Cardboard viewers. The NBA has streamed games through NextVR. And now Pokemon Go – which has “augmented” VR – is truly a sensation. This is all just the beginning. And this will not flame out like Google Glass. VR is here to stay.
So what does this mean for you? VR will be much more than just entertainment. It’s an entire new computing platform that promises to have profound implications for our lifestyles – both at home and at work. And it ultimately will impact the laws. If you want to get up-to-speed, start with this a16z podcast with Chris Milk about the new language of storytelling using VR – and then listen to this podcast that more generally talks about the VR industry. This stuff will blow your mind. Trust me.
VR & Movie Theatres
Let’s dig a little into how VR will change our lives. One concern often expressed about VR is that people will stop going to the movies. We have heard the death knell before. Thirty years ago, the introduction of VHS cassettes, the rise of Blockbuster and “video stores” spelled doom. More recently, the growing popularity of Netflix, Hulu and Redbox meant trouble. Yet, many still go to the theatre.
VR could prove different for the movie theatre industry. Or maybe not. But interestingly, my son recently watched a movie while virtually sitting in a theatre (so he had the contraption on and placed himself in a theatre that had a movie playing). Imagine doing that with your far-flung friends and family, perhaps watching an old home movie. Or maybe with a large group of like-minded people.
VR opens new ways to watch movies – and virtual theatres might well be economically viable on their own. The overhead would sure be low – and the key would be marketing a niche type of movie or movie-going experience that would be uniquely shown in your theatre.
VR & Courtrooms
Technology is increasing deployed during trials to influence jurors and judges. These days, a wide range of technology is used to produce reconstructions, reenactments and demonstrations. This includes:
– Three-dimensional stop action animation – use of objects which are photographed with a stop-action film or video camera to create a frame.
– Key frame animation – inputting data into a computer program where the programmers specify an object, its location and its destination.
– Scripted animation – programmer determines the position of objects in each frame, rather than leaving it to the computer to fill in gaps.
As noted in this old Nixon Peabody memo, courts consider several factors in admitting videos and computer animation as demonstrative evidence where methods of producing such evidence other than the traditional video camera are used. If the purpose of the video is to demonstrate the expert’s opinion rather than to replicate what actually happened, courts have been inclined to admit the evidence, assuming proper foundation is laid.
Now imagine having the judge and jury observe a reconstruction or reenactment using VR. This would be a much more powerful illustration of the incident central to the case – or pertaining to an aspect of it.
Trials continue to fascinate a big chunk of the public. TV is filled with procedural dramas built around trial lawyers – and that’s been the case for decades, from “Perry Mason” to “L.A. Law” and “Matlock” to modern shows like “Law & Order” and “The Good Wife.” Not to mention reality TV like “The People’s Court” and “Judge Judy.”
Imagine being allowed in the courtroom to witness a case firsthand, particularly for a “Trial of the Century” case like O.J. Simpson’s murder trial. And the VR experience could even enhance the actual trial – with commentators voicing over explanations of what is happening or providing expert analysis about a lawyer’s or judge’s specifications.
At least for me, attending oral arguments before the U.S. Supreme Court sends chills down my spine. Not only is there the drama of the lawyers for both sides being peppered with questions by the nine Justices, but there are historical practices that go back centuries that make the experience like no other. For example, at the beginning of each session, after all the Justices magically appear at their seats from behind a long red curtain, the Marshal of the Court announces: “The Honorable, the Chief Justice and the Associate Justices of the Supreme Court of the United States. Oyez! Oyez! Oyez! All persons having business before the Honorable, the Supreme Court of the United States, are admonished to draw near and give their attention, for the Court is now sitting. God save the United States and this Honorable Court.”
The Supreme Court still adheres to its ban on televising or videotaping its proceedings (it does make audio and transcripts available), but if it ever opened its eyes to allow a VR experience – it would teach many how the court operates and how special it is.
Here’s a blog by Duane Morris’ Rich Silfen: As many of us have noticed, the first comment letters from the Staff in the SEC’s Division of Corporation Finance, following Corp Fin’s recent issuance of new CDI guidance on the presentation of non-GAAP financial measures, have become available publicly. The comment letters shed additional useful light on Corp Fin’s views concerning non-GAAP presentations.
One of the comment letters sent to Alexandria Real Estate Equities on June 20th provides a particularly helpful glimpse into Corp Fin’s views about the use of non-GAAP information in the executive summary of MD&A. The staff’s letter includes the following comment in reference to MD&A in the registrant’s 2015 Form 10-K:
We note that in your executive summary you focus on key non-GAAP financial measures and not GAAP financial measures which may be inconsistent with the updated Compliance and Disclosure Interpretations issued on May 17, 2016 (specifically Question 102.10). We also note issues related to prominence within your earnings release filed on February 1, 2016. Please review this guidance when preparing your next earnings release.
Indeed, the executive summary portion of the MD&A – when initially conceptualized in the SEC’s 2003 release providing interpretive guidance in the preparation of MD&A – was supposed to include an overview to facilitate investor understanding. The overview was intended to reflect the most important matters on which management focuses in evaluating operating performance and financial condition. In particular, the overview was not supposed to be duplicative, but rather more of a “dashboard” providing investors insight in management’s operation and management of the business.
Looking back at the release to write this blog entry, I note references, with regard to Commission guidance on preparation of the MD&A overview, explaining that the presentation should inform investors about how the company earns revenues and income and generates cash, among other matters, but should not include boilerplate disclaimers and other generic language. The Commission even acknowledged that the overview “cannot disclose everything and should not be considered by itself in determining whether a company has made full disclosure.”
Many companies have presented in their MD&A overview those non-GAAP measures used by management to operate the business and otherwise manage the company. Where appropriate, references typically are made to the information appearing elsewhere in the document, presented to enable compliance with applicable rules and guidance for non-GAAP presentations. Interestingly, the staff, in its comment, questions the “prominence” of the non-GAAP presentation in the context of the earnings release (noting that the staff provides less specificity in the portion of its comment relating to the MD&A overview).
This focus on prominence – to the extent the staff’s concerns relate to the MD&A overview – is worth further consideration in preparing MD&A disclosure. In this connection, query whether the staff – in questioning prominence – could be expressing a view that when management analyzes for investors the measures on which it focuses in managing the business, if management relies on non-GAAP measures, it necessarily must focus on (and explain) – with no less prominence – the corresponding GAAP measures.
Evolving Director Compensation
In this 23-minute podcast on CompensationStandards.com, Russ Miller & Yonat Assayag of ClearBridge Compensation Group discuss the evolution of director compensation, including:
1. What is the upshot of the recent director compensation lawsuits?
2. Why haven’t boards been sued more frequently since there is the tricky circumstance that directors set their own pay?
3. How are companies reacting by changing their plans? (see their study: “S&P 500 Trends in Director Pay Limits“)
4. Are directors resisting the movement to amend their pay plans & place limits on their pay?
5. What is the role of the compensation consultant in helping directors set their own pay?
This podcast is also posted as part of my “Big Legal Minds” podcast series. Remember that these podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Books & Records: Private Company Employees Get Smart
– Advancement of Legal Fees: “Fee on Fee” Awards
– NASAA: Proposed Policy on Electronic Offering Documents & E-Signatures
– SEC Enforcement: Financial Fraud Cases
– Internal Controls: Leads to Auditor Opinion-Shopping?
Here’s news from Scott Kimpel of Hunton & Williams: As described in this press release, the SEC brought yet one more settled administrative case yesterday against a public company – Health Net – based on confidentiality & waiver provisions contained in employee severance agreements – paying a $340k penalty. Like in the BlueLinx action brought last week, the SEC determined that these provisions violated the anti-whistleblower rules it adopted under Dodd-Frank – and again, there is no indication that the company actually sought to enforce the offensive provisions. Here’s the SEC order, which contains excerpts of the impermissible contractual language.
Toni Chion, an Associate Director in the SEC’s Enforcement Division, supervised both cases – which may suggest that the cases are the product of a broader enforcement sweep…
Sunshine Act: SEC’s Quorum Rule Helps to Keep Rulemakings at a Near Standstill
I love blogging about the Sunshine Act. As I’ve blogged before, the SEC has a quorum rule that has the end result that a single Commissioner can refuse to show up & effectively veto a Commission action when the Commission has three sitting Commissioners or less. Which is the case for the foreseeable future since the Senate has failed to confirm the two folks waiting to be confirmed since last year.
Here’s an excerpt from this recent WSJ article about how the quorum rules vary at the federal agencies:
Not all short-handed federal agencies are as hobbled by the restrictions of a 40-year-old open-government law as the top U.S. overseer of derivatives. The Commodity Futures Trading Commission’s big-sister agency, the Securities and Exchange Commission, is similarly short-handed, with three of five slots occupied. But the top markets cop gets around the government in the Sunshine Act hitch largely because the law allows regulators to come up with their own definition of a quorum—the number of commissioners required to be present for their agency to act on a matter.
So the SEC came up with a special “quorum” rule, which says no decision can be made without at least three members present—if three is the number of commissioners in office. If the agency drops to only one or two commissioners, that is enough for a quorum, the rule says.
That creates its own complexities: By simply not showing up to a vote, a dissenting commissioner can block the agency from acting altogether. This effective veto power is complicating what is likely Mary Jo White’s final year as SEC chairman and could leave undone a raft of rules on issues that tend to split the commission along party lines.
The Sunshine Act was meant to prevent regulators from crafting deals in proverbial smoke-filled rooms. The law prohibits a majority of commissioners at government agencies from “deliberating” on policy matters outside of a public meeting.
At the depleted CFTC—where two of the five slots on the commission have been vacant since August 2015 due to stalling in Congress—two sitting commissioners now make a majority. And because it is a blurry line between discussing policy and deciding it, the three commissioners largely avoid interacting directly. Commissioners rely on their aides to hammer out deals, slowing down deliberations by weeks.
Spanking brand new. By popular demand, this comprehensive “Form S-8 Handbook” covers the entire terrain, from share counting & filing fees to updating prospectuses & deregistration. This one is a real gem – 69 pages of practical guidance – and its posted in our “Form S-8″ Practice Area.
Study: Most Americans Get Their News From Social Media
This blog by Kevin O’Keefe spells out what I view as obvious: a Pew Research Center study that finds that 62% of all Americans get their news from social media. Think about how you receive your news for our community. I imagine much of it is blogs & LinkedIn right now – but podcasts, video, etc. will continue to be a growing force in how you learn the latest…
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– IPOs: Common SEC Comment Letter Issues
– Survey: 50% Evaluated Non-Management Strategies
– Directors Survey: 50% Evaluated Non-Management Strategies
– Women in C-Suite Boost Profitability
– XBRL Guidance & Validation Rules Anticipated Later This Year
– CEO Succession Planning Disclosure Seems to Matter
Following up on my recent blog about how pay ratio & the SEC have made it onto the “Jeopardy!” TV show, a member pointed out that an entire category was devoted to the SEC last year. Scroll down to the bottom left corner of this Jeopardy board. Here are the five answers:
– The SEC’s original purpose was to give confidence to investors who lost money due to the crash of this year ($400)
– The SEC says this illegal type of trading involves “possession of material, nonpublic information about” a stock ($800)
– The SEC regulates this type of 5-letter material that allows shareholders to vote without being present ($1000; Daily Double!)
– Being misleading over a housing market investment cost this “group” $285 million when the SEC got wind of it ($1600)
– She brought down John Gotti; “You don’t wanna mess with Mary Jo”, said President Obama, in nominating this current SEC head ($2000)
Study: Highest-Paid CEOs Actually Run Some of the Worst-Performing Companies
Here’s the intro from this blog by Cooley’s Cydney Posner (which is related to this popular blog from last week):
As reported in the WSJ, a new study from corporate-governance research firm MSCI showed that, over the long term, there was a signficant misalignment between CEO pay and stock-price performance. The study looked at CEO pay relative to total shareholder return for around 800 CEOs at more than 400 large- and mid-sized U.S. companies over a decade (2006 to 2015).
For the companies surveyed, the study found, on average, that CEO pay and performance had an inverse relationship; according to the WSJ, “MSCI found that $100 invested in the 20% of companies with the highest-paid CEOs would have grown to $265 over 10 years. The same amount invested in the companies with the lowest-paid CEOs would have grown to $367.” In light of how deeply embedded the concept of performance-based pay is among compensation consultants, boards, proxy advisory firms and institutional holders, characterizing that result as counter-intuitive might be considered an understatement.
What accounts for these stunning results? The WSJ concluded that the study “results call into question a fundamental tenet of modern CEO pay: the idea that significant slugs of stock options or restricted stock, especially when the size of the award is also tied to company performance in other ways, helps drive better company performance, which in turn will improve results for shareholders. Equity incentive awards now make up 70% of CEO pay in the U.S.” Fortune, reporting on the same study, quotes MSCI to similar effect: “‘[W]e found little evidence to show a link between the large proportion of pay that such awards represent and long-term company stock performance. In fact, even after adjusting for company size and sector, companies with lower total summary CEO pay levels more consistently displayed higher long-term investment returns.’”
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Hedge Fund Activism: CEO & CFO Turnover Spike
– IPOs: Common SEC Comment Letter Issues
– Directors Survey: 50% Evaluated Non-Management Strategies
– Women in C-Suite Boost Profitability
– XBRL Guidance & Validation Rules Anticipated Later This Year
– CEO Succession Planning Disclosure Seems to Matter
Spanking brand new. By popular demand, this comprehensive “Best Efforts Offerings Handbook” covers Rule 10b-9 and min/max offerings, a topic rarely covered in any deals-related treatise. This one is a real gem – 24 pages of practical guidance – and its posted in our “Best Efforts Offerings” Practice Area.
Pay Ratio: Can You Just Use Cash Compensation? (No)
A lot has been written over the last week about PayScale’s recent study of pay ratios in the workforce. PayScale found an average ratio of 71:1 comparing median cash compensation for 168 of the highest-paid CEOs in the annual Equilar 200 study to cash compensation of the median employee for those companies.
This ratio is far below what other organizations – like the “AFL-CIO PayWatch” – have found. That’s because PayScale only used cash compensation in its calculations – not the big hitter items like options, restricted stock, etc. As noted in this blog, equity accounted for 68% of the CEO compensation included in the Equilar 200 study used for the PayScale comparison. In other words, on average, less than one-third of CEO compensation was earned in cash.
I find PayScale’s exercise a tad misleading because the SEC’s rules don’t allow a comparison of just cash compensation – annual “total” compensation must be used in the ratio. Enough said.
One good thing about the PayScale study is that it provides information about employee perception of CEO pay, including:
– 55% of employees were not aware of their CEO’s compensation – among those that were, 80% believed it was appropriate
– 57% of those who felt that their CEO is overcompensated also believe that this negatively affects their view of their employer
– Employees at higher levels have more knowledge about – and more readily approve – of CEO compensation than lower level employees
More on “The US Citizenship Ceremony: An Emotional Experience”
A long while back, I blogged about how great my friend’s citizenship ceremony was – and I received a number of kind notes. For example, Kevin LaCroix of “D&O Diary Blog” fame shared:
Thanks for your post about your friend’s citizenship ceremony. It has been nearly 30 years since I was a law clerk for a district court judge, but I still get goose bumps when I remember the naturalization ceremonies at the courthouse while I was clerking. I think every American should witness one of these events, at least once, just as a reminder of what we have. Thanks for sharing your friend’s happy news.
And another member said:
What a nice story, and it brought back good memories for me. Many (many, many) years ago I worked for a federal district judge in Pittsburgh. The naturalization proceedings rotated among the judges, but when my judge had one, he pulled out all the stops–boy scout color guard, American Legion reception, and the most stirring speech that you ever heard by the judge on what it means to be an American. There wasn’t a dry eye in the place by the time they took the oath, and I’m sure it was a day the new citizens would never forget. Is this a great country or what?
Here’s news from Scott Kimpel of Hunton & Williams: As described in this press release, the SEC brought a settled administrative case yesterday against a public company – BlueLinx Holdings – based on confidentiality & waiver provisions contained in employee severance agreements. The SEC determined that these provisions violated the anti-whistleblower rules it adopted under Dodd-Frank. Here’s the SEC order, which contains excerpts of the impermissible contractual language.
In addition to paying a penalty of $265k and contacting former employees to inform them about the SEC’s order, BlueLinx is required to include the following provision in new severance & other agreements with employees governing confidential information:
“Protected Rights. Employee understands that nothing contained in this Agreement limits Employee’s ability to file a charge or complaint with the Equal Employment Opportunity Commission, the National Labor Relations Board, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other federal, state or local governmental agency or commission (“Government Agencies”). Employee further understands that this Agreement does not limit Employee’s ability to communicate with any Government Agencies or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including providing documents or other information, without notice to the Company. This Agreement does not limit Employee’s right to receive an award for information provided to any Government Agencies.”
As with a similar action that the SEC brought against KBR last year, there is no evidence that BlueLinx actually sought to enforce the troublesome provisions. In the SEC’s view, the simple presence of the language is enough to constitute a violation. I also note that although the defendant here was publicly traded and listed on the NYSE, the same prohibition would apply equally to a privately-held company.
SEC’s ALJs: The Stakes Go Up!
Here’s a memo from Wachtell Lipton’s Wayne Carlin & David Anders:
The U.S. Court of Appeals for the D.C. Circuit recently upheld the constitutionality of SEC administrative proceedings in Raymond J. Lucia Cos. v. Securities and Exchange Commission. This is a significant victory for the SEC. In recent years, the SEC has brought increasing numbers of enforcement actions as administrative proceedings, rather than in federal court. A number of litigants have fought back and attempted to challenge the SEC’s choice of forum, in part because the administrative process affords much more limited opportunities to conduct discovery and lacks other protections that exist in federal court.
The pivotal issue presented is whether administrative law judges are “officers of the United States” within the meaning of the Appointments Clause of Article II of the Constitution, or whether they are “lesser functionaries.” Officers of the United States must be appointed by one of the methods specified in the Appointments Clause, which is not the procedure followed for the SEC’s ALJs. The Lucia court was the first court of appeals to consider this issue on the merits, and it concluded that the ALJs are not officers of the United States, thereby rejecting the argument that they are improperly appointed. While other parties may continue to litigate this issue in other circuits, the Lucia decision will likely be influential and will be viewed by the SEC as a vindication of its increased use of the administrative forum.
A decision issued on August 5 by the SEC sitting as an appellate tribunal illustrates some of the perils of the administrative process. In the Matter of John J. Aesoph, CPA and Darren M. Bennett, CPA . The Commission upheld an ALJ’s determination that a partner and a senior manager from a Big 4 audit firm engaged in improper professional conduct in their audit of a regional bank in 2008 and 2009. The ALJ had imposed time-limited suspensions from practicing before the Commission, for periods of one year for the partner and six months for the senior manager. The two respondents appealed the decision on the merits to the Commission. In a cross-appeal, the Division of Enforcement argued that the partner should be suspended for three years and the senior manager for two years.
The Commission found that both respondents had engaged in improper professional conduct. In addition, by a 2-1 vote (with two continuing vacancies on the Commission), the Commission determined to impose stiffer sanctions on appeal than its own Division of Enforcement was seeking. The Commission denied both accountants the privilege of appearing or practicing before it, with a right to re-apply for reinstatement (after three years and two years, respectively). Enforcement had not sought a re-application requirement to follow the period of suspension. As Commissioner Piwowar explained in dissent, this requirement can add years to the process of reinstatement, thus making the impact on the respondents much more severe.
With the decision in Lucia, the trend of more cases in the administrative forum is likely to continue. Proceeding administratively also gives the Commission the ability to advance its programmatic goals more directly than it may be able to do in federal court.
More on “Study: Highest-Paid CEOs Actually Run Some of the Worst-Performing Companies”
Here’s a note from Pearl Meyer’s Dave Swinford in response to this blog that I ran on CompensationStandards.com’s “The Advisors’ Blog”:
A recent Wall Street Journal article proclaimed, “Best-Paid CEOs Lag in Results, Study Says.” The article was based on an MSCI study titled “Are CEOs Paid for Performance? Evaluating the Effectiveness of Equity Incentives.” The article essentially, said two things: 1) the summary compensation table (SCT) in proxy disclosures does not predict what executives will actually receive; and 2) three years is not a long enough frame to measure the relationship between pay and shareholder returns.
This is not news.
Everyone in this business knows that the SCT measures accounting cost, not compensation actually paid or received. Three years is simply not long enough to get a good read on management’s long-term performance. The MSCI report makes these points, but then goes on to provide the headlines that excite the press.
MSCI argues that we should measure and report realized pay—something that a number of companies already do in their proxies. However, the authors of the study did not examine that, probably because the analysis would be extraordinarily time-consuming and complex.
There are other more important and relevant points we should glean from the MSCI study:
1. The SCT was not designed as a pay-for- performance (PFP) analysis tool. It started out as a measure of compensation expense when the SEC took an accounting approach to the compensation disclosure issue. However at that time, PFP was not the focus that it is today.
2. Corporate governance professionals and Congress (through Dodd Frank) are asking the proxy statement to provide information that current disclosure rules were not designed to provide, so we need something different, like realized pay.
The headlines make it sound as if executive pay is flawed, but the study says that the reporting of executive pay is flawed for the purpose of analyzing the relationship of pay- to- performance. That’s a big difference. Until we move away from SCT definitions of pay, and extend the time frame of evaluation to a minimum of five years, we will not be able to properly assess pay vs. performance.
A good analysis of PFP requires looking at financial performance beyond Total Shareholder Return (TSR) because TSR is impacted by many outside pressures over three- to- five-year time frames. Earnings growth and return on capital measures are far more indicative of management’s recent performance than TSR. They indicate fundamental company health, and both are more substantially within management’s control.
This is why the alternative measure reporting in the proposed SEC rules on pay versus performance is so important—TSR is not the answer for the time periods that we have been measuring. Until we sort out the basis for making pay versus performance comparisons, we will continue to debate CEO pay without the benefit of relevant or accurate facts.
Also see this rebuttal to the MSCI study from Pay Governance posted on CompensationStandards.com…
On June 28th, the U.S. District Court for the District of Delaware issued a potential landmark unclaimed property audit-related memorandum opinion in the case between Temple-Inland and the State of Delaware. The decision is very satisfying for holders who have either experienced extreme extrapolation and sampling methods conducted by third-party auditors during audits (especially on behalf of Delaware) — or have feared they might be in such a situation in the future.
The most important part of the court’s decision deals with a motion for summary judgment requested by Temple-Inland relating to its substantive due process claim. The decision concludes that Delaware’s extrapolation methodology and audit techniques during an audit of Temple-Inland violated its constitutional right to substantive due process.
A remedy for this violation has not yet been provided by the court. Although the ultimate effect of this case on future audits in Delaware or elsewhere is unknown, it is believed by many that this could be the beginning of a “kinder, gentler” — and fairer — unclaimed property audit process throughout the industry. To see a legal analysis of this decision, we suggest you visit the recent blog written by our friends at McDermott, Will and Emery.
Perhaps the most shocking (and satisfying) aspect of this court decision is the comment made by Judge Gregory M. Sleet: “[t]o put the matter gently, [Delaware has] engaged in a game of ‘gotcha’ that shocks the conscience.” In fact, “shocking the conscience” was a necessary condition in order for the court to conclude that the combined actions of Delaware and its auditor, Kelmar, violated constitutional substantive due process.
Executive Agreements: Poor Drafting Leads to Litigation
For those of you that are also members of CompensationStandards.com, I hope you are taking advantage of the three blogs on that site. In addition to my “The Advisor’s Blog,” Mark Borges and Mike Melbinger have been doing an amazing job on their respective blogs for 11 years. Eleven years!
Here’s a recent blog from Mike Melbinger about how vague drafting of an employment agreement can really hurt you:
A federal district court case decided last week involved an issue we see all too often. In Willis Re, Inc. v. Hearn (E.D. Pa. 2016), a chief executive officer announced his “retirement” from his long-time employer – and went to work for a competitor. The company sought repayment from the former CEO of a portion of a $1.75 million incentive awards made to him during the three years before his retirement. According to the former CEO, the governing award agreement allowed him to retain the award if he retired.
In March 2013, 2014, and 2015, the parties signed letter agreements making “AIP Awards” to the CEO of $1,750,000 each for 2012, 2013, and 2014, subject to: “If your employment with Willis ends prior to December 31, [2015] [2016] [2017] for any reason other than your incapacity to work due to your permanent disability (as “disability” or a substantially similar term is defined within an applicable Willis long term disability plan/policy), death, your redundancy (as redundancy is determined by Willis in accordance with its usual human resource administration practices) or your retirement, you will be obligated to repay to Willis a pro-rata portion of the net amount … of the Willis Retention Award (the “Repayment Obligation”).”
To define “retirement” the award agreements referred to (i) “your employment agreement” or (ii) “a written retirement policy applicable to you as a Willis employee” or (iii) “by reference to the ending of your employment at such mandatory age as may apply in the applicable employment jurisdiction” or (iv) “as may be determined by Willis in its absolute discretion.” The pension plan provided for retirement benefits, including an “Early Retirement Benefit” for a participant who retires on his “Early Retirement Date,” which the plan defined as the first day of any month following the date the participant attains age 55 and has completed at least 10 years of service.
In May 2015, when he was 59-years old and employed by the company for 21 years, the CEO announced his “decision to retire from Willis Re Inc., effective May 15, 2015 to explore other options and pursue other interests.” The company agreed that the CEO was eligible for an “Early Retirement Benefit” under the pension plan, but argued that the pension plan was not a “written retirement policy” under the AIP Award letters. Instead, the company claimed that the AIP Awards allowed it to define “retirement under in its absolute discretion under subsection (iv) and that it had determined that the CEO did not retire.
Rather than construing the ambiguous contract terms against the drafter of the agreement, as many courts would do, the court instead announced that it would not assume the contract’s language “was chosen carelessly” or “that the parties were ignorant of the meaning of the language employed.” The court said: “The words used in subsection (ii) are “written retirement policy,” not “Pension Plan.” If these sophisticated parties negotiated incentive payments for a chief executive officer intended the term “written retirement policy” to be defined as eligibility for benefits under the Pension Plan, they were free to include it. The parties could have done so in the same way the parties expressly defined “disability” in the phrase “incapacity to work due to your permanent disability” as the definition “within an applicable Willis long term disability plan/policy” and “redundancy” as “determined by Willis in accordance with its usual human resource administration practices.” The parties could have referred to the Pension Plan in subsection (ii), but did not do so.”
The court held that the company was entitled to define “retirement under the AIP Awards in its absolute discretion” and upheld the company’s decision that the CEO did not retire. At this stage, the company won. However, because the court’s decision was a fairly close run thing, the CEO is likely to appeal it – unless the parties negotiate a settlement. Either way, it will lead to more legal costs and headaches for the company, which could have been avoided through better drafting.
Finally, we note that because the CEO left to work for a competitor, it seems like the case should have been an easy one. The court observed that the CEO had acknowledged his obligation to “comply with certain terms and conditions applicable to time after his retirement from Willis, including an obligation not to compete with Willis for a period of [12] months beginning May 15, 2015.” However, apparently those provisions also were not clear.
We’ve been covering Corp Fin’s new non-GAAP CDIs extensively – including two blockbuster webcasts. Here’s an update from Scott Kimpel of Hunton & Williams:
Sufficient time has passed since the Corp Fin Staff issued the new CDIs on non-GAAP financial measures such that comment letters based on them are becoming publicly available. Below are a sampling of letters that have become publicly available in the last several weeks – which raise issues with presentation of non-GAAP metrics.
A common comment relates to ordering & prominence under Item 10(e), but they seem to run the gamut and hit on each of the new CDIs. So far, it appears the Staff has largely been accepting a company’s promise to make changes in the next quarterly reporting cycle. It will be interesting to see if Corp Fin becomes more assertive after a few more quarters of reporting. The samples are:
Also see the recent May-June issue of “The Corporate Counsel” print newsletter, which provides great guidance in this critical area…
Heavy Non-GAAP Users More Prone to Restatements & Internal Control Weaknesses?
Here’s an excerpt from this Cooley blog by Cydney Posner:
This article in the WSJ suggests that there may be even more to it than just potentially misleading numbers: according to a study by consultant Audit Analytics, conducted for the WSJ, companies that lean heavily on non-GAAP measures to significantly pump up their earnings “are more likely to encounter some kinds of accounting problems than those that stick to standard measures….”
Podcast: Cybersecurity Risks & Responses
Davis Polk has released its second podcast – this one with Neil MacBride, former U.S. Attorney for the Eastern District of Virginia – who is now at Davis Polk – to discuss the topic of cybersecurity and the related risks and responses…
