According to this recent KPMG study, companies planning to go public consider corporate governance to be their biggest challenge. Under the study, the top three challenges in preparing for an IPO are:
– Improving corporate governance – 64%
– Preparation of a robust business plan – 40%
– Preparation of financial track record – 36%
How long do these pre-IPO executives believe that it would take their company to prepare for going public?
– 12 to 18 months – 15%
– 6 to 12 months to prepare – 54%
– 6 months or less – 10%
The Latest Venture Capital Developments
In this podcast, Jonathan Axelrad and Anthony McCusker of Goodwin Procter discuss the latest developments impacting the venture capital community:
– What is the climate for venture capital these days?
– What types of companies are VC investors targeting?
– Are companies being funded outside the US?
Survey Results: Directors from Financial Service Sectors Weigh In
Recently, PwC held its annual Financial Services Audit Committee Forum in New York. As I understand it, it’s the biggest annual gathering of board members from across the financial services sectors, including banks, mutual funds, hedge funds, private equity firms, insurance companies, broker-dealers, REITs and related service providers in attendance. During the Forum, PwC polled attendees on several topics related board governance and financial reform:
– 28% of respondents indicated they feel their board currently spends too much time on compliance issues and not enough time on strategic business decisions
– 18% said that the Dodd-Frank Act would require their boards to take on new responsibilities traditionally handled by executive management.
– 18% also said they think that Dodd-Frank blurs the line between governance and management with regard to the role and responsibilities of board members
– As a result of financial reform, 44% said their firms’ would increase spending on compliance
– 58% of those polled believe that the tone at the top of the organization and the corporate culture set by the CEO will have the greatest impact on promoting the safety and soundness of the financial system
– Regarding new “say on pay” provisions, 83% of those polled say that are confident in the current effectiveness, quality and transparency in communicating with investors about executive compensation
In this podcast, Dave Lynn and Marty Dunn engage in a lively discussion of the latest developments in securities laws, corporate governance, and pop culture. Topics include:
Maybe this is a bad idea. You tell me. But I thought I’d try an occasional installment of fictional dialogue to inject a little more humor into this blog. Here is my first one:
Sam (from the Controller’s office): Hi Jimmy. Can you review the draft of our Form 10-Q and provide us with any comments by the end of today?
Jimmy (from the Legal Department): I would love to but I have at least five meetings today. Plus I have a bad “feeling” about this quarter.
Sam: Bad feeling. How so?
Jimmy: Well, my coin dealer told me it was valuable – but I think I was shafted. [Pulls quarter from pocket.]
Sam: Oh, that’s so ’70s Jimmy. Coin collecting is long dead. Just review the Q and mark it up pronto.
– – – – –
Jimmy (muttering to himself, back at his desk): He doesn’t know what he’s talking about. Being a numismatist is where it’s at; it’s been listed in the Top 100 hobbies by “Hobby World” magazine for years. We’ll see what he thinks about this…
– – – – –
Sammy (yelling on the phone): What is this Jimmy? I have your comments right here.
Jim: Well?
Sam: They’re so…so…symmetrical. It looks like you just struck every 8th word!
Jimmy: Maybe.
Sam (slamming down the phone): Crazy. But it’s probably the best work you’ve done around here.
Next episode: Jimmy teeters towards the “dark side”…
Please send me your ideas for “Jimmy from Legal” episodes. Or let me know how I can spice this feature up…
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:
– Impact of FINRA Regulations on the Structuring and Distribution of Public Offerings
– Home Countries Unwilling to Allow Inspections: Non-US Auditors Must Prove SOX Compliance
– Is the DOJ Moving Beyond the FCPA?
– An Insider’s View of the SEC: Principles to Guide Reform
– The Countrywide Settlement: Significant Questions
A while back, I blogged about what might be the sleeper in the Dodd-Frank Act and received many interesting responses from members. Here are a few that I received:
– Pay disparity disclosures – In his OnSecurities Blog, Marty Rosenbaum discusses pay disparity disclosures as a sleeper. The SEC won’t propose rules in this area before next summer and many are hoping for Congress to at least pass a technical corrections bill to fix the language in this provision.
– SEC’s bounty program – Under Section 922, if a whistleblower provides information on a securities law violation that leads to monetary sanctions of more than $1 million, the SEC will be required to pay the whistleblower an amount ranging from ten percent to 30 percent of what has been collected. This bounty would apply to a wide range of securities law violations, including violations of the Foreign Corrupt Practices Act. Even before the SEC proposed rules under this provision two weeks ago, law firms were warning how this could be a problem for companies who rely on employees to report potential problems through their own compliance chains, as employees will now a big incentive to go directly to the SEC.
– Congo conflict materials – The Act has a new requirement to disclose in an annual report whether a company products contain minerals from Congo or neighboring countries and if so, what steps those companies are taking to track the source of the minerals. Believe it or not, PBS has a video on conflict minerals disclosure.
– Expanded authority of SEC’s Enforcement to use administrative courts – In this Reuters article, it is noted that a little noticed provision in Dodd-Frank gives the SEC additional authority to seek civil penalties and fines against respondents in administrative proceedings rather than in federal court.
– Elimination of rating agency exemption from Reg FD – Section 939B directs the SEC to amend Reg FD within 90 days of the law’s enactment to remove the exemption for rating agencies that is contained in Reg FD. I’ve blogged a bit about this since I first asked for sleeper feedback since the SEC adopted rules to effectuate it, which created a stir.
Dodd-Frank: An Unintended Consequence?
Different than a “sleeper” is the unintended consequence of a Congressional act. In her footnoted blog, Michelle Leder recently noted this unusual Form 8-K filed by Newmont Mining. Well, perhaps it formerly was unusual but going forward, disclosure about a miner carrying his lunchbox may become the norm…
We’re done! Just in time for mandatory say-on-pay, Dave Lynn and Mark Borges have finished updating the Lynn, Borges & Romanek’s “2011 Executive Compensation Disclosure Treatise & Reporting Guide.” This means that:
2. Hard copy – For those that want a hard copy of this massive 2011 Treatise, note that it is not part of CompensationStandards.com – so it must be purchased separately. However, CompensationStandards.com members can obtain a 40% discount by trying a no-risk trial to the hard copy now. This will ensure delivery of this 1000-plus page comprehensive tome as soon as it’s done being printed after Thanksgiving.
If you need assistance, call our headquarters at (925) 685-5111 or email info@compensationstandards.com.
Audit Analytics continues to do good work and their recent study based on six years worth of enhanced internal controls under Section 404 of Sarbanes-Oxley is no exception. In short, the study found:
– The percentage of adverse auditor attestations has declined every year for 5 years and is down to 2.4% for Year 6.
– Likewise, for Year 6, the percentage of adverse management-only assessments was the lowest – but this rate was about 10x higher than the rate experienced by companies required to file auditor attestations.
As a community that flies often, you should take 10 seconds to sign this online petition against the new invasive body searches being conducted at our airports (when I signed it last night, I was #300 – now it’s over 28k). “Signing” just requires you to input your name and email address – no other contact information is required. Here is a WaPo article about the new searches – they are very personal and shocking.
New Standards for Comfort Letters? AICPA Makes a Proposal
I’m catching up on some draft blogs that need to belatedly come to “life.” Back in July, the Auditing Standards Board of the AICPA – in this Exposure Draft – proposed auditing standard to replace SAS 72 on comfort letters. Thanks to Bob Dow of Arnall Golden Gregory for reminding me of this development.
IFRS Status: FASB and IASB Seek Input
Recently, the FASB and IASB issued a 21-page discussion paper requesting input about the effort it will take them to adopt the convergence projects that are underway, including transition methods, whether adoption of new standards should occur at the same time or over a number of years and whether different effective dates would be appropriate for different entities. Comments are due January 31st. We have posted memos regarding this development in our “IFRS” Practice Area.
Last week, FINRA issued updated guidance on the same day clearance procedures for shelf offerings – as well as expedited review guidance for shelf offerings filed for regular review. The Same Day Clearance Eligibility Guide – and this set of FAQs – clarifies that same day clearance is only available for registered primary shelf offerings made pursuant to the SEC’s Rule 415 and, therefore, is not available if any selling shareholder securities are included, the offering includes an equity line of credit, an offering made pursuant to the multi-jurisdictional disclosure system is not a shelf offering, or the final prospectus supplement for the offering has already been filed with the SEC. Greater clarity on these exclusions is set forth in the Same Day Clearance FAQs #3, which also indicates that the Staff may identify other categories of offerings not eligible for SDC.
FINRA states that it will conduct an expedited review of such a shelf offering only if all relevant documents are provided, all representations are made in the COBRADesk screens, a statement is provided that the filing member has completed its due diligence to confirm its representations, and the filer provides the anticipated effective date and a request for expedited review. FINRA clarifies that shelf offerings will not qualify for expedited review if any of the underwriters are to receive securities as compensation, an unreasonable term or arrangement is included or the offering is filed late. The expedited review guidance confirms FINRA’s recommendation that a filer seeking expedited review that can’t rely on the SDC process should contact FINRA’s Corporate Financing Department to discuss the offering with the applicable Staffer.
Having visited the Sistine Chapel earlier this year – and being blown away by it – I thought I would share this virtual 3-D tour, which apparently was created by some folks at Villanova at the request of the Vatican. Viva technology!
Congress: The Mid-Term Election’s Impact on the Corporate Community
After the mid-term elections – and before the infighting for powerful committee chair positions, etc. has played out – a number of folks have conducted their analysis of what the mid-term elections mean for the corporate community. Here are a few:
“One Global Policy” Approach to D&O Insurance Policies
In this podcast, Heidi Lawson of Chadbourne & Parke explains the need for directors & officers to be covered globally by D&O insurance policies, including:
– Does a “one global policy” approach work today?
– How can a company determine whether that approach works for them?
– If more local policies are recommended, what brokers can be used to find good policies?
One item in Dodd-Frank that I admit that I haven’t paid much attention is the SEC’s creation of a new “Office of Investor Advocate.” I imagine I shrugged it off because the SEC’s primary mission is investor protection. So shouldn’t the entire agency essentially should be in this new office? Not to mention that an “Office of Investor Education and Advocacy” already exists – and an “Investor Advisory Committee” was created just last year. Like so many things in Dodd-Frank, Section 915 seems to mandate things the SEC already does (or has done).
Anyways, as this NY Post article notes, the SEC is now searching for someone to head up this new Office (which makes sense given the SEC’s tentative schedule for Dodd-Frank implementation indicates that this Office will be created this month). Here’s the job description posted by Korn/Ferry, a recruiter hired to help in the search. It looks like a significant part of the Advocate’s job will be preparing reports for Congress, in addition to the primary task of serving in an ombudsman role to investors.
It is doubtful that this new Office will be combined with the existing Office of Investor Education for two reasons. One is that I believe Congress mandated this new Office because it wanted to function separately and independently from the existing Office of Investor Education. There are several signs of that (egs. new Advocate reports directly to SEC Chair and has power to hire “independent” counsel, etc.). In addition, the new Advocate job can’t be filled by someone already at the SEC, as Dodd-Frank mandates that the person shall not have worked at the SEC for at least two years prior to being hired. It will be interesting to see how the Advocate’s role evolves over time…
For some fun, watch this three-minute video entitled “Toxie’s Dead” from NPR’s show, Planet Money. It’s about Toxie, a personified toxic asset that helped burst the housing bubble.
More on “FASB: Proposed Loss Contingency Standard Won’t Apply to Calendar Year-End Form 10-Ks”
A few weeks ago, I blogged how the FASB advised that calendar year-end companies will not be required to comply with the FASB’s proposed new loss contingency disclosure standards in their 2010 Form 10-Ks. Here is an update on this development from PricewaterhouseCoopers:
At yesterday’s meeting, the FASB discussed the redeliberation plan for its loss contingencies disclosure project. The FASB staff summarized the feedback provided by respondents in the comment letter process. Many respondents recommended that the existing standard be retained and that the proposal not be finalized. The Board discussed whether the concerns raised by investors result from a compliance or standard-setting issue. The Board noted that the SEC has recently emphasized compliance with the existing standard through the SEC’s process of providing comment letters to registrants, and its recent “Dear CFO letter”, dated October 2010.
Prior to concluding on whether an amendment to the existing standard is still needed, the Board decided to evaluate whether there is improved disclosures of loss contingencies during the 2010 year-end financial reporting cycle. At that time, the Board will decide whether any future redeliberations are needed or whether additional outreach on the proposal should be made. This decision effectively delays the project until the second quarter of 2011 at the earliest, and most likely until the second half of 2011.
Poll: Which Flintstones’ Character Could Best Serve as the Investor Advocate?
Since it’s a holiday, take part in this “fun & easy” anonymous poll:
What if a company touts in one of its SEC filings that – although several of its customers had sought indemnification from it for claims of patent infringement made against those customers by a third-party – the company had obtained opinions of counsel that concluded the company’s products did not infringe the asserted patents and the patents were invalid regardless? Would this disclosure of the conclusion of these opinions constitute a waiver of any claim to the attorney-client privilege and the work product doctrine?
It appears there are few cases addressing this waiver issue. But at least in one case, the answer is “yes.” In this order, the US District Court for the Middle District of Georgia found that – in AFLAC v. Intervoice – that the defendant had “let the cat out of the bag” by disclosing its counsel’s conclusions and ordered that the opinions be produced.
Section 304: Second Circuit Rules in Clawback Case of First Impression
Here is something I blogged on “The Advisors’ Blog” on CompensationStandards.com a while back: I pulled the following from this press release from Carter Ledyard, the law firm which won this case:
On September 30, 2010, in an important case of first impression, the United States Court of Appeals for the Second Circuit held that public companies may not indemnify their CEOs or CFOs from liability under Section 304 of the Sarbanes Oxley Act, which mandates that if a public company is required to restate its financial reports as a result of misconduct, the CEO and CFO must reimburse the company for any bonuses, incentive compensation, or trading profits that they earned during that period.
The Second Circuit held that Section 304, whose purpose is to prevent CEOs and CFOs from profiting by misleading investors and regulators about the financial health of their companies, does not provide a private cause of action and may only be enforced or waived by the SEC. Allowing a public company to indemnify and release its officers and directors from liability under Section 304 would nullify the SEC’s authority to pursue the Section 304 remedy or to grant exemptions from the statute.
The case before the Second Circuit, In re: DHB Industries, Inc. Derivative Litigation, Docket No. 08-3860-cv (2d Cir. Sept. 30, 2010), was an appeal from the approval by the United States District Court for the Eastern District of New York of a settlement of derivative lawsuits brought on behalf of shareholders of a public company formerly known as DHB (now Point Blank Solutions, Inc.) against former CEO David H. Brooks, former CFO Dawn Schlegel, and other former officers and directors of the company. One of the key provision of the settlement was that DHB would indemnify Brooks and Schlegel from any liability under Section 304 of the Sarbanes Oxley Act.
On September 14, 2010, Brooks and former COO Sandra Hatfield were convicted on 31 criminal charges stemming from their participation in a conspiracy involving massive securities fraud and theft of company assets. Schlegel had earlier pled guilty to having participated in this conspiracy. The SEC currently has actions pending against Brooks, Schlegel and Hatfield in the Southern District of Florida, in which it seeks disgorgement of $186 million under Section 304. The effect of today’s ruling by the Second Circuit is that DHB, which is currently undergoing bankruptcy proceedings in the United States Bankruptcy Court for the District of Delaware, In re Point Blank Solutions, Inc., Case No. 10-11255-PWJ, is no longer bound by the terms of the settlement to reimburse its officers and directors for their liability under Section 304, and is instead eligible to recoup those funds itself if the SEC’s pending actions are successful.
The ‘Former’ Corp Fin Staff Speaks on Proxy Access & Dodd-Frank
We have posted the transcript of our popular webcast: “The ‘Former’ Corp Fin Staff Speaks on Proxy Access & Dodd-Frank.”
Here is something that I blogged recently on CompensationStandards.com’s “The Advisor’s Blog“: What should be the frequency of our say-on-pay vote? This is a question being mulled at most companies these days. Perhaps we are starting to get an answer when ISS issued its draft policy updates last week for comment, which included this statement, an excerpt of which is below:
The MSOP is at its essence a communication vehicle, and communication is most useful when it is received in a consistent manner. ISS supports an annual MSOP for many of the same reasons it supports annual director elections rather than a classified board structure: because it provides the highest level of accountability and direct communication by enabling the MSOP vote to correspond to the information presented in the accompanying proxy statement for the annual shareholders’ meeting. Having MSOP votes only every two or three years, potentially covering all actions occurring between the votes, would make it difficult to create meaningful and coherent communication that the votes are intended to provide. Under triennial elections companies, for example, a company would not know whether the shareholder vote references the compensation year being reported or a previous year, making it more difficult to understand the implications of the vote.
Recently, I caught up with a proxy solicitor – Dave Bobker of Phoenix Advisory Partners – to get his analysis of what companies should be considering regarding the frequency of their say-on-pay vote in this podcast, in which Dave addresses:
– What frequency do you think most companies will pick? Least?
– What frequency do you see most investors asking for?
– What would you recommend?
– What factors should companies consider when picking a frequency?
Nugget #2: Board Evaluations – Consider Splitting “Questionnaire” into Two Components (One Oral and One in Writing)
A few months ago, I started dribbling out some of the gems that Alan Dye and I shared a number of years ago during a series of “50 Nuggets in 50 Minutes” webcasts. Here is #2:
Board Evaluations – Consider splitting “questionnaire” into two components: one oral and one in writing – A number of companies split the format of their board evaluations. They use a written questionnaire for administrative issues, such as whether the length of meetings is appropriate and whether materials are sent out timely. The more sensitive and substantive questions are asked in an oral interview (“substantive” questions are those that directly relate to the company’s recent performance issues). This can allow for more candid and valuable feedback as some directors might balk if asked to reduce their concerns to writing due to perceived liability concerns.
One member notes that since they began board self-evaluation, they have used the bifurcated model of survey and interview – the survey helps identify areas to explore in the interviews and the interviews have provided the most value to the board.
A few weeks ago, Davis Polk teamed with The Conference Board and issued this press release about disclosure trends of the Dow 30 over the past year. The findings included:
– Risk oversight models vary, but boards tend to directly review strategic risk issues.
– Non-financial companies typically report having a dedicated Chief Risk Officer.
– The CEO/chairman combination remains the prevalent leadership structure in the Dow 30.
– Specific industry expertise is cited as critical in director selection, and all companies say they consider diversity when identifying director nominees.
– Companies recognize a correlation between top-executive compensation and risk behavior, using an array of measures to mitigate such risk including clawbacks and stock-holding guidelines.
– A number of non-financial companies retain compensation consultants through their governance, rather than compensation, committees.
– Compensation consulting fees can be small relative to other disclosed fees paid to the same consultants for, e.g., actuarial or HR services.
A question you need to ask yourself every year. Here is some input from Richard Blake of Wilson Sonsini:
Once Dodd-Frank rules are finalized and effective, there will be a number of changes to the D&O questionnaires including – but not limited to – compensation committee independence requirements. But for now, the only thing that has been proposed that could affect proxies, and that likely will be effective for this proxy season, are the say-on-pay rules – and note that say-on-pay is mandatory for this proxy season even if the SEC doesn’t finalize its rules (although that’s not the case for say-on-golden parachute).
I think the only thing that could affect D&O questionnaires apart from say-on-pay is the inclusion of new Reg. S-K Item 402(t) – disclosure of “golden parachute compensation” – which would be different and broader than the disclosure in Item 402(j), which is likely already included in the questionnaires. The Item 402(t) disclosure need only be provided if the company wants to take advantage of the SEC rules that say that they don’t need to take a say-on-golden-parachutes-payments vote upon an acquisition event if they previously received a favorable say-on-pay vote that included Item 402(t) disclosure. So sort of a company’s choice as to what it wants to do, particularly since some companies don’t ask about compensation in the questionnaire since they already know what they are paying their executives.
Gearing Up for Say-on-Pay: What Clients Are Asking Now
Tune in tomorrow for this CompensationStandards.com webcast – “Gearing Up for Say-on-Pay: What Clients Are Asking Now” – featuring Towers Watson’s Eric Larre; Semler Brossy’s Blair Jones, Pay Governance’s Ira Kay, Deloitte Consulting’s Mike Kesner and Verizon’s Mary Lou Weber as they provide guidance about how you can put your best foot forward with shareholders to help gain their approval on the ballot. This is the first of a trio of say-on-pay webcasts on CompensationStandards.com – renew now for 2011 as all memberships expire at year end. Or if you are not yet a member of that site, try a 2011 no-risk trial and gain access to this webcast for free.
As I belatedly blogged on Tuesday, this blog was selected by LexisNexis as a “Top 25 Business Law Blog” last week – and then the 25 blogs were pitted against each other in a short voting contest. I’m proud to say that we easily emerged as #1 – as noted in this announcement – garnering 36% of the total vote! Thanks to those that bothered to vote – your karma will be rewarded. We are now 2-for-2 as this blog won the ABA Law Journal’s voting contest for the best legal blog earlier this year.
The son of a friend of mine has kicked off a new webisode series called “Naked Man” on YouTube and iTunes. Despite the title, the videos are “clean” and thus safe for work. The series’ tag line is “In a world full of danger, a hero arrives. But why is he naked?” Subscribe to receive new episodes as they are rolled out…
Political Spending Shareholder Proposals: Chamber Board Members Targeted
Yesterday, a group of investors issued this press release noting that shareholder proposals regarding political spending were being filed at four companies – Accenture, IBM, Pepsi and Pfizer – who have directors that also sit on the board of the Chamber of Commerce. This tactic of challenging companies more broadly to review their policies and oversight of political expenditures by targeting a specific trade association is interesting and perhaps a harbinger of things to come.
According to the press release, these companies were selected due to their strong governance records (as well as vendor policies in three of the cases). The release also notes that more proposals likely would be filed (did you know that the Chamber’s board has representatives from over 100 companies?). Finally, the release has a sample shareholder proposal at the bottom of it…
Yesterday, the SEC extended the compliance date for amendments to Regulation SHO by pushing it out a few months to February 28th. The original compliance date was next Wednesday, November 10th.
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:
– Apple’s Earnings Release: Did It Go Out on the Wire?
– Is Your CEO Being Arrested for DWI/DUI Material?
– Whistleblower Complaints: Likely to Rise with Heightened Emphasis on Corporate Bounty Hunters
– Delaware Court Permits Stockholders to Shorten Term of Airgas Staggered Board
– Disclosure of Adviser Conflicts: When Is It Enough?
