With Congress moving quickly on financial regulatory reform, huge changes are afoot for executive compensation practices and the related disclosures – that will impact every public company. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a special early bird discount rate to help you attend our popular conferences – “Tackling Your 2011 Compensation Disclosures: The 5th Annual Proxy Disclosure Conference” & “7th Annual Executive Compensation Conference” – to be held September 20-21st in Chicago and via Live Nationwide Video Webcast (both of the Conferences are bundled together with a single price). Here is the agenda for the Proxy Disclosure Conference.
Special Early Bird Rates – Act by Tomorrow, April 15th: Register by April 15th to take advantage of this discount.
US Sentencing Commission: Changes Requirements for Effective Compliance & Ethics Programs
Last week, the US Sentencing Commission voted to modify the Federal Sentencing Guidelines for organizations, including the provisions that set forth the attributes of an effective compliance and ethics program. These changes take effect on November 1st.
As noted in this Gibson Dunnmemo, after considering a number of proposed changes to these Guidelines, the Commission voted to:
– Enhance the report obligations from a compliance officer to the board of directors in order for the compliance program to be deemed effective in all circumstances;
– Clarify the steps a corporation must take to meet the Commission’s requirement for proper remediation in the event criminal conduct occurs;
– Reject the proposed language that would have mentioned, for the first time, the appointment of monitors as a possible component of the remediation requirement or, separately, as a possible condition of probation for a convicted corporation; and
– Reject language under consideration that would have given document retention policies unique prominence in the list of compliance program requirements.
The Carol Burnett Show: Takes On Discount Airlines
I got nostalgic watching this skit from the fantastic Carol Burnett Show from my youth about the experience of “no frills” airline travel. Carol, Tim Conway, Harvey Korman. I love it when Carol kicks Tim for having his foot on the carpet…
Every year or so, we survey the practices relating to blackout and window periods (there are results from nine others in our “Blackout Periods” Practice Area). Here are the latest survey results, which are repeated below:
1. Does your company ever impose a “blanket blackout period” for all or a large group of employees?
– Regularly before, at, and right after the end of each quarter – 67.7%
– Only in rare circumstances – 17.2%
– Never – 15.1%
2. Does your company allow employees (that are subject to blackout) to gift stock to a charitable, educational or similar institution during a blackout period?
– Yes, but they must preclear the gift first – 31.9%
– Yes, and they don’t need to preclear the gift – 9.6%
– No – 33.0%
– Not sure, it hasn’t come up and it’s not addressed in our insider trading policy – 25.5%
3. Does your company allow employees (that are subject to blackout) to gift stock to a family member during a blackout period?
– Yes, but they must preclear the gift first – 24.5%
– Yes, and they don’t need to preclear the gift – 8.5%
– No – 33.0%
– Not sure, it hasn’t come up and it’s not addressed in our insider trading policy – 34.0%
4. Are your company’s outside directors covered by blackout or window periods and preclearance requirements?
– Yes – 96.8%
– No – 3.2%
5. Our company’s insider trading policy defines those employees subject to a blackout period by roughly:
– Stating that all Section 16 officers are subject to blackout – 1.1%
– Stating that all Section 16 officers “and those employees privy to financial information” are subject to blackout – 10.6%
– Stating that all Section 16 officers “and others as designated by the company” are subject to blackout – 27.7%
– Stating that all Section 16 officers “and those employees privy to financial information and others as designated by the company” are subject to blackout – 41.5%
– All employees – 13.8%
– Some other definition – 5.3%
– Our company doesn’t have an insider trading policy – 0.0%
Please take a moment to respond anonymously to our “Quick Survey on ‘Code of Ethics and the Board’.”
Big Changes Afoot: How to Handle a SEC Enforcement Inquiry Now
Tune in tomorrow for the webcast – “Big Changes Afoot: How to Handle a SEC Enforcement Inquiry Now” – to hear former senior SEC Enforcement Staffers Colleen Mahoney of Skadden Arps, Chris Mixter of Morgan Lewis, Russ Ryan of King & Spalding and Linda Chatman Thomsen of Davis Polk discuss how the Division of Enforcement’s investigative process works now that the SEC has dramatically overhauled some of its Enforcement processes and procedures, and what that means for you.
Recession Did Not Substantially Alter Institutional Investment Strategies
It’s not the normal type of thing I blog about, but this struck me so I thought I’d share if you didn’t see it otherwise. Recently, The Conference Board issued this press release noting a study that all major categories of institutional investors (including pension funds, mutual funds, insurance companies, savings institutions and foundations) have remained fundamentally committed to the same investment policies they were adopting prior to the credit crunch.
I’m not sure whether to believe the study’s findings or be happy that perhaps I can beat the market after all. More likely is that it doesn’t even matter at the end of the day. It just struck me so I put it out there…
When Corp Fin’s comment letters (and responses) became publicly available a few years back, it was natural to think that this blog would be regularly analyzing this important back-and-forth process. For a number of reasons, we haven’t gone in that direction.
But once in a while, a comment letter comes to your attention, one that can’t be ignored. Last year, North American Galvanizing & Coatings filed this preliminary proxy statement with an innovative (and problematic) proposal that would restate the company’s certificate of incorporation with a provision that sought to make large shareholders “liable” for the consequences of voting in favor a shareholder proposal (see Proposal 5 on page D-34). In other words, the restated charter would have essentially saddled 1% or greater shareholders with the same responsibility as directors.
As noted in the company’s response, this proposal was withdrawn from the proxy statement in response to this Corp Fin comment letter. As the comment letter notes, this proposal would have to overcome a heap of state and federal law issues – and likely would be subject to a heated legal challenge from activists.
Interestingly, Joe Morrow – well-known founder of proxy solicitor Morrow & Co. – is Chair of North American Galvanizing & Coatings’ board and a major shareholder of the company. I have no idea whether Joe was involved in coming up with the idea for this proposal.
Justice Stevens and the Loss to Investors/Shareholders
In his “Race to the Bottom Blog,” Prof. Jay Brown continues to write interesting stuff. His latest is analysis of the impact caused by Justice Stevens’ retirement on the securities law cases heard in the US Supreme Court.
More on our “Proxy Season Blog”
With the proxy season in full gear, we are posting new items regularly on our “Proxy Season 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:
– Microsoft’s Video Interview with a Director
– Annual Meeting Scripts: The Skinny (and Samples)
– Fixing the Problems with Client Directed Voting
– 2010 AFL-CIO Key Vote Scorecard
– Preparing the New Proxy Disclosures: Some Examples and Analysis
Yesterday, the PCAOB issued this Practice Alert reminding independent auditors about their responsibilities to assess and respond to the risk of material misstatements of financials due to error or fraud posed by significant unusual transactions. Notably, the Practice Alert states:
Significant unusual transactions, especially those close to period end that pose difficult “substance over form” questions, can provide opportunities for companies to engage in fraudulent financial reporting. Further, the auditor’s evaluation of whether the company’s financial statements are presented fairly, in all material respects, in conformity with the applicable financial reporting framework, includes the consideration of the financial statement presentation and disclosure of significant unusual transactions.
This is a practice alert because as the alert notes, the standard on auditing for fraud already requires auditors to consider these unusual transactions. As I recall, the Auditing Standards Board has also issued Practice Alerts on this same issue in the past. It is quite likely this may become a topic of discussion between auditors and audit committees in the near future.
The Ratings Game: Association of Corporate Counsel Gets In
A few months ago, the Association of Corporate Counsel announced that it would start producing “value index” ratings of law firms, based on evaluations provided confidentially by its members (it’s called the “ACC Value Challenge“). It’s a good idea on its face – but as you could imagine, it is likely to create a heap of controversy. That’s already starting with this ABA Journal report that some of the ACC’s ratings have already been leaked prematurely (and here is an earlier blog – and another article).
Given that peer remarks can be one of the most influential factors in getting hired, this may prove to be a powerful tool. My problem with the ACC rating system is that – based on this demo evaluation form – it seems to allow only firms themselves to be evaluated – not individual attorneys like Avvo does. Since most folks hire lawyers for their own abilities and not so much for the law firm’s own brand (except for the most strongly-branded firms perhaps), the ACC framework might not be as useful as it could be…
The Socially Irresponsible Investor: A Video Parody
Here is a video parody about Wormwood Bayne, the stock fund for socially irresponsible investors. Hat tip to Jim McRitchie, who tipped his hat to Cliff Feigenbaum…
English may be the first language of business, but when it comes to M&A, you won’t get very far without a thorough grounding in the unique English dialect known as “Bankerspeak.”
Bankerspeak owes its existence in large part to the most productive jargon generation machine ever invented: the American business school. (Whatever else they’ve accomplished, business schools have been teaching future MBA’s to “proactively leverage synergies” for more than a century!) But Bankerspeak also couldn’t exist without significant contributions from marketing consultants, who’ve helped professionals learn to frost their b-school jargon with a heavy coating of smarminess.
Now, before the bankers in the audience get all huffy, let me concede the obvious point that lawyers take second place to no profession when it comes to generating incomprehensible gibberish. But, our crimes against the English language tend to be in written form, while the bankers’ offenses are almost always verbal.
The biggest reason for the difference between the professions on this point is the extraordinary efforts that law schools make to transform literate liberal arts graduates into the “legal literati.” If, like most lawyers, you were a liberal arts major, then chances are you were a pretty decent writer when you went to law school. Come to think of it, if you were a liberal arts major, chances are that the ability to write an English sentence was about the only skill you had, which is why you ended up in law school in the first place.
But I digress.
Anyway, if you saw someone get off a bus and cross the street prior to your first legal writing class, you would probably have written the following description of what you saw: “I saw a woman get off the bus and cross the street.” After you took legal writing and joined the legal literati, that description probably looked more like this: “I observed a female (the “Person”) egress the multi-passenger vehicle (sometimes hereinafter referred to as the “Bus”) and traverse the thoroughfare.”
The other reason that Bankerspeak tends to be a spoken dialect is that most bankers wouldn’t be caught dead actually drafting something that didn’t consist almost exclusively of numbers. This is actually okay, because most lawyers can’t do math well enough to balance a checkbook.
At any rate, Bankerspeak is pretty ubiquitous in the transactional world, and those who aren’t fluent in it are at a real disadvantage. So, as a public service, here’s a handy guide to interpreting some commonly used Bankerspeak phrases:
– Bankerspeak: It’s a turnaround scenario, but we’re very high on management.
– English: The business looks like the 21st Century answer to Penn Central, but the CEO plays golf with one of our Managing Directors.
– Bankerspeak:This deal is very time sensitive.
– English: I leave for the Caribbean in two weeks.
– Bankerspeak: We understand your concern, and we’ll leave that as an open issue for now.
– English: No.
– Bankerspeak: At this point, how visible are the assumptions behind your projections?
– English: Seriously, do you have any idea what you’re talking about?
– Bankerspeak: We need you to give some thought to our position on this issue
– English: Think of me as the Voice of God.
– Bankerspeak: The market is a little choppy right now. We may want to wait until things settle down.
– English: Your deal is dead.
– Bankerspeak: We view this as potentially a positive from a marketing standpoint.
– English: Your deal is dead, but we haven’t figured out how to break the news to you yet.
– Bankerspeak: There’s a lot of hair on this deal.
– English: I’m impressed. You must have really worked overtime to screw the company up this badly.
– Bankerspeak: We need to give some thought to the optics of this.
– English: My God, this looks horrible! Your business ethics would make Bernie Madoff blush.
I don’t care what William Shatner says — Bankerspeak is the real “language of the deal!”
Ringing the NYSE Bell: What Does It Feel Like?
On his “IR Musings” Blog, John Palizza gives a great account of what it feels like to ring the NYSE bell. I’ve never done it myself and have now added it to my bucket list…
SEC Proposes Changes to Regulation AB
Yesterday, at an open Commission meeting, the SEC proposed changes to its regulations impacting asset-backed securities. Here’s the press release and Chair Schapiro’s opening remarks – and here is the proposing release.
Probably not the best indicator of morale since the survey took place at the end of ’08 – and the SEC’s reputation has been significantly sullied since then – the SEC recently posted the results of a biannual job satisfaction survey. The SEC’s survey is based on a subset of a much larger “Federal Human Capital Survey.”
Here are a few thoughts:
– For starters, I am surprised to see these results made publicly available. I don’t recall seeing something like this before, but I may be remiss. Not a big deal that they are – it’s just not the type of thing you normally see posted.
– 1605 out of a possible 3125 Staffers (51%) responded to the survey, with an equal mix of supervisors and subordinates participating.
– This survey provides data compared to the last two surveys (’06 and ’04), as well as the responses of all government employees to the ’08 survey.
– Overall, morale seemed pretty good at the SEC as of the end of ’08. There were 63 questions asked – and typically, a majority were positive when answering a query. Overall, the SEC Staff’s level of positiveness often were in line with the government as a whole.
– As could be expected – given that the crisis was in full force at the end of ’08 – the SEC scored lower in this survey for many questions compared to the last two biannual surveys. But not as much as you would expect given the circumstances.
– The area that seems like it needs the most work is “complaints, disputes or grievances are resolved fairly in my work unit” (question #44 on page 12). Positive answers were 32% – but in line with prior two surveys and not far below the government-wide average. Similar ratios existed for “promotions based on merit” (question #22) and “steps are taken to deal with a poor performer” (question #23). I know how hard it is to discipline someone in the government – supervisors are sued all the time for the smallest things, so these don’t really surprise me.
As an aside, note that at least one version of the regulatory reform bills floating on Capitol Hill calls for a GAO study regarding the SEC’s revolving door (personally, I don’t see a problem with it – having a government background allows folks to better serve clients and also is one of the reasons why the government is able to recruit good people on the cheap). This WSJ article from yesterday was critical of this difficult issue for the Staff.
I’d be curious to see how law firms rate in a number of these categories. My guess is not too well. Good management is tough to accomplish. And supervisors in both the government and law firms often are not properly trained in this art…
The SEC Hires a “Kathy Griffin”: Freed from the “D” List?
While I was on vaca, the SEC announced that Kathleen M. Griffin has been named the agency’s first Chief Compliance Officer – the latest in a series of measures undertaken to strengthen the SEC’s internal compliance program. The announcement came on April Fool’s Day, so naturally I thought that Kathy Griffin had finally been taken off the “D” list. But alas, the SEC was not joking – nor has Kathy been freed from her semi-celebrity status as the SEC hired a different Ms. Griffin.
By the way, there is precedent for the SEC issuing a press release in the form of a joke on April Fool’s Day, as I blogged about in ’07.
Marty Rosenbaum has his ONSecurities.com Blog up and running again. Check out his recent analysis of the intersection of baseball and proxy statements.
Just Mailed: Romeo & Dye Section 16 Deskbook
Peter Romeo and Alan Dye just completed the 2010 edition of the Section 16 Deskbook and it’s now in the mail to those that subscribe to the Romeo & Dye Section 16 Annual Service. To receive this critical Section 16 resource, try a ’10 no-risk trial to the “Section 16 Annual Service.”
The front page of last Thursday’s Wall Street Journal announced “CEOs See Pay Fall Again,” and no, it wasn’t an April Fools’ Day joke. According to the data tracked by the WSJ, the median value of total direct compensation (comprised of salaries, bonuses, long term incentives and grants of stock and stock options) for the CEOs of 200 major US companies declined 0.9% to $6.95 million. This was described as only the third drop in total direct compensation since 1989, when the WSJ began tracking the data, and the second year in a row for a decline, with 2008 seeing a 3.4% drop in CEO pay.
The big question remains, where is CEO pay going to go now? One thing that is surprising to me is that the drop in median total direct compensation for CEOs was so modest for 2009. With the continuing effects of the recession and financial crisis, as well as an overall level of public and shareholder anger over executive compensation, the trend doesn’t seem to indicate any sort of long-term revisiting of the overall size of CEO pay packages. The article notes that pay curbs put in place in the 2008-2009 timeframe appear to be ending, at least anecdotally.
What the Top Compensation Consultants Are NOW Telling Compensation Committees
For more on the latest executive compensation trends, note that we have posted the transcript for our recent CompensationStandards.com webcast: “What the Top Compensation Consultants Are NOW Telling Compensation Committees.”
The SEC’s Bounty Program
A report out last week from the SEC’s Inspector General notes that the SEC’s two-decade old bounty program for paying whistleblowers in insider trading cases has paid out only $159,537 to five people. I didn’t even know there was such a program, and I guess I wasn’t alone. The report notes a number of recommendations, such as improving the process for applying for bounties and informing the public about the availability of the bounties. The SEC’s Director of Enforcement agreed with all the recommendations, so we are likely to see some ramp up in the bounty efforts. The SEC has recently asked Congress to expand its authority to pay bounties in all sorts of Enforcement cases that would bring in fines of over $1 million.
The latest report from Cornerstone Research shows a sharp drop-off in federal securities fraud class action filing activity in 2009. Continuing a trend that we have seen over the past few years, the 169 federal securities fraud class action filings in 2009 were off 24% from 2008, and were well below the historical average over the past ten years. Included in this big decline was a sharp retreat in credit-crisis filings, down nearly 47% from 2008 levels.
By contrast, the average value for settlements in 2009 increased to $37 million compared with $28 million in 2008, according to another study published by Cornerstone Research. Securities class action settlements totaled $3.8 billion in 2009, an increase of more than 35 percent over 2008. The Cornerstone study also reports 103 settlements approved in 2009, up from 97 reported in 2008. Professor Joseph Grundfest, Director of the Stanford Law School Securities Class Action Clearinghouse (which works in cooperation with Cornerstone Research), observed that, “Because securities fraud litigation typically settles three to five years after the first complaint is filed, this year’s settlement activity reflects lawsuits brought roughly between 2004 and 2006. Given litigation trends over those years, the 2009 settlement data are within the zone of expected settlements, and aren’t much of a surprise.”
Pressure on Audit Fees Intensifies
Apparently it is not just the lawyers facing pressure on their fees these days. As this recent CFO.com story notes, the tide has turned on audit fees, with companies ramping up the pressure on audit firms to reduce fees and provide more services. Following years of ever-increasing audit fees in the wake of the Sarbanes-Oxley Act, along with auditors “firing” their riskier clients in large numbers, the recent trend (at least since 2007) has been a decline in audit fees, coupled with increasing incidences of companies being the ones dumping their auditors, presumably in favor of cheaper alternatives.
According to data analyzed by CFO, companies with revenues in the $250 million to $500 million range saw a drop of 5% in their fees from 2007-2008, while smaller companies in the $100 million to $250 million range saw an 8% drop on average. The growing practice at public companies is for chief financial officers to benchmark what the company is paying its auditors against the company’s peers, utilizing the readily available audit fee disclosure.
One concern noted with the pressure on fees – low-balling the auditor on fees risks pressuring auditors to underaudit, with abnormally low fees serving as a negative sign for shareholders and the market on the theory that “you get what you pay for.” The article cites examples – like the $186,000 per year audit fees paid Madoff’s multi-billion dollar fund – where the fees just don’t add up to the relative size or complexity of the audit.
This fee pressure is no doubt a trend that is here to stay – even the concerns arising from the financial crisis seem to be outweighed by the pressure on bottom lines to cut professional fees wherever possible and to put everything out for re-bid.
More on our “Proxy Season Blog”
With the proxy season in full gear, we are posting new items regularly on our “Proxy Season 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:
– Shareholder Meetings: Eni’s Rules of Order
– Surfing Champion Surfaces in a Proxy Filing…
– Court: Non-Shareholder has Standing to Challenge Director Election
– The Board Diversity Disclosures: What They Look Like So Far
– Proxy Disclosures: Another SEC Enforcement Action
Asset-backed securities have been in the spotlight ever since the financial crisis hit, with high-rated residential mortgage backed securities bearing a share of the blame for investor losses following the real estate market crash. What often gets lost in the debate about asset-backed securities is how the SEC had adopted in 2004 (at the height of the bubble by coincidence) a very comprehensive and workable set of rules governing the registration and disclosure system for asset-backed securities in the form of Regulation AB and some related offering rules, where no such rules had existed before. [Broc and I both spent some time in the group handling asset-backed securities in Corp Fin, and before Regulation AB, the “lore” for how to handle asset-backed securities from an SEC perspective was passed down through internal memos, sample comments, handwritten notes, spoken word and a handful of public no-action letters!]
Yesterday, the SEC announced that coming up next Wednesday April 7th, the Commission will consider whether to propose revisions to Regulation AB and other rules relating to the offering, disclosure and reporting process for asset-backed securities. Under consideration are the rules governing the shelf offering process and eligibility criteria for asset-backed securities, and the proposals would require asset-backed issuers to provide enhanced disclosures, including information regarding each asset in the underlying pool in a standardized, tagged format. The Commission will also consider changes to Rule 144A and other rules applicable to privately offered asset-backed securities (where a good deal of the action has historically been in that market).
Given the considerable Congressional and media attention on asset-backed securities, I suspect that these rule proposals will no doubt be seeking to enhance investor protections and disclosure in the asset-backed securities market, rather than seeking to in any way to relax existing regulatory requirements.
Enforcement’s New Chief Accountant
Recently, the SEC announced that Howard Scheck is rejoining the Division of Enforcement as Chief Accountant. Howard is currently a partner in the Forensic & Dispute Services practice of Deloitte Financial Advisory Services LLP, and he had previously served in Enforcement for 10 years, including some of that time spent in the now extinct Branch Chief role.
As with Corp Fin, Enforcement relies heavily on the expertise of accountants in conducting investigations. Howard has both a J.D. and an accounting degree, so he brings to the job the perspectives of both a lawyer and accountant.
Our April Eminders is Posted!
We have posted the April issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Yesterday, the Supreme Court vacated the judgment of the Seventh Circuit in the much watched case of Jones v. Harris Associates L.P. The Court held that in order to demonstrate that a mutual fund investment advisor breached the “fiduciary duty with respect to the receipt of compensation for services,” a mutual fund shareholder must show that the advisor charged “a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s length bargaining.” The holding essentially confirms a standard (known as the Gartenberg standard) that had been applied in most lower courts over the past 30 years, closing the door on the ability of judges to impose what they deem to be reasonable fees and instead letting the marketplace decide.
Of particular note in the case was that in the Seventh Circuit proceedings, Judge Posner’s dissent questioned the ability of the market to police excessive compensation more broadly, noting that “executive compensation in large publicly traded firms often is excessive because of the feeble incentives of boards of directors to police compensation” and that “competition in product and capital markets can’t be counted on to solve the problem.” The Supreme Court did not pick up on any of these broader topics, noting “[t]he debate between the Seventh Circuit panel and the dissent from the denial of rehearing regarding today’s mutual fund market is a matter for Congress, not the courts.”
The State of Shareholder Engagement Today
I think that one of the key observations about this year’s proxy season is that we are seeing unprecedented levels of issuer engagement with shareholders on issues, including on corporate governance and executive compensation concerns. Movements such as “say on pay” are all about driving more engagement, although it is perhaps too soon to tell whether increased engagement is really making a difference.
The IRRC Institute and ISS recently announced that they are jointly conducting a study of the state of issuer-investor engagement in the United States. They just started the process of seeking input from issuers and investors on their engagement activities, utilizing a short web-based survey that investigates the issues, goals and outcomes of engagement. IRRCI/ISS hope that “[r]esponses will provide important information on the level and focus of engagement activity, as well as insight into the expectations and experiences of both issuers and investors. The goal of the study is to illuminate how the engagement process can become more productive and successful for both issuers and investors.”
How to Prepare for ISS’ New GRId
In this podcast, Ning Chiu of Davis Polk discusses how to prepare for RiskMetrics Group’s new Governance Risk Indicators (“GRId”), including:
– What is ISS’ new governance rating service?
– How does it differ from CGQ?
– What governance areas do you recommend that companies focus on most going forward?
