In this CompensationStandards.com podcast, James Williams, General Counsel of Liquidity Services, provides insights into the role of in-house counsel in the executive compensation setting process, including:
– How much of your time do you spend on compensation-related issues?
– What is your role in scheduling, attending and preparing for compensation committee meetings?
– Where do you think you add the most value in the process?
– How do you handle the tricky issues of supporting the board as well as supporting senior management?
Thirty Now Blogging: “The Advisor’s Blog”
I just added ten executive compensation lawyers to the mix of the new – and popular – “The Consultant’s Blog” on CompensationStandards.com. With the group of bloggers now comprising of twenty compensation consultants and these ten lawyers, I have renamed it: “The Advisor’s Blog.” For those who haven’t, members should input their email addresses on the left side of that blog so they can be alerted when a new entry is made (nearly one entry per day has been the average and that should continue with the influx of new talent).
Mark Borges struck “Gold, Jerry, Gold” in his analysis recently of the new Item 402 interps in his “Proxy Disclosure Blog.” Meanwhile, Mike Melbinger continues to deliver on his “Melbinger’s Compensation Blog,” last week covering a new IRS revenue ruling on Section 162(m).
The Latest Compensation Disclosures: A Proxy Season Post-Mortem
We have posted the transcript from the popular CompensationStandards.com webcast: “The Latest Compensation Disclosures: A Proxy Season Post-Mortem.”
With a decision in the Free Enterprise v. PCAOB lawsuit expected soon – and some rumblings that the DC Circuit Judges could strike SOX based on the discussions during an April hearing – it’s probably time to start thinking “what if” the court does indeed kill Sarbanes-Oxley. Here’s an analyst report that goes down that road – and here is a transcript from the hearing. Both are posted in our “Sarbanes-Oxley Reform” Practice Area.
Survey Results: Audit Committees and Earnings Releases
We have posted our survey results on audit committees and earnings releases, repeated below:
1. Does your Audit Committee review your company’s earnings releases prior to their release to the media?
– Yes – 92.1%
– No – 7.9%
2. If the answer to #1 is “Yes,” how many days prior to public issuance of the earnings release is a draft typically sent to the Audit Committee?
– One day or less – 25.9%
– Two days – 31.0%
– Three days – 20.7%
– Four days or more – 22.4%
3. Does the Audit Committee hold a meeting for the purpose of discussing each earnings release prior to their release to the media?
– Yes, and mostly (or all) by telephone meetings – 80.7%
– Yes, and mostly (or all) by face-to-face meetings – 8.1%
– No – 11.3%
4. If the answer to #3 is “No,” is the Audit Committee informed about issues that will be discussed in the related earnings release?
– Yes, in writing – 16.7%
– Yes, at a meeting – 50.0%
– No – 33.3%
5. Does your Audit Committee hold a single meeting to review both the earnings release and draft Forms 10-Q and 10-K?
– Yes – 50%
– No – 50%
It’s interesting to compare these survey results with an identical survey that we conducted three years ago. Don’t forget to take a moment and take our new “Quick Survey on Disclosure Committees”!
UK Regulator Issues Guidance on Auditor Liability Limitation Agreements
With IFRSs making front page news in Saturday’s NY Times (here is the article) and CIFiR’s final reform recommendations due in August, it’s instructive to see how other jurisdictions are handling similar challenges to reforming the audit industry.
One of the biggest concerns is how auditors will survive being sued (see this CFO.com article, which highlights this CAQ comment letter). A few months back, I blogged about auditor liability caps in the UK. Recently, the United Kingdom’s Financial Reporting Council – the FRC is the UK’s independent regulator for corporate reporting and governance – issued guidance on the use of agreements between companies and their auditors to limit the auditor’s liability, as provided for under the UK’s Companies Act 2006.
The guidance:
– explains what is – and is not – allowed under the 2006 Act
– sets out some of the factors that will be relevant when assessing the case for an agreement
– explains what matters should be covered in an agreement, and provides specimen clauses for inclusion in agreements
– explains the process to be followed for obtaining shareholder approval, and provides specimen wording for inclusion in resolutions and the notice of the general meeting
Anything can happen. As this CFO.com article notes, regulators are talking about a three-year moratorium on new accounting rules if IFRS is adopted.
Late Friday, Corp Fin issued a new set of Regulation S-K Compliance & Disclosure Interpretations. This new set consolidates all of the existing Reg S-K CDIs and adds some new ones, including a few under Item 402. It also re-numbers all of the CDIs.
On Friday, the SEC also finalized its guidance and amended the rules to streamline how the self-regulatory organizations – SROs – conduct their rulemaking, including broadening the circumstances under which SRO rules (and rule changes) become immediately effective.
More on the “B” Corporation: Duties to Constitutiencies Beyond Shareholders
Last month, I blogged about the “B” Corporation and a member asked: Ohio Revised Code Section 1701.59 expressly permits directors to consider the interests of, among others, the community and society, the economy of the state and nation, employees, suppliers and creditors. I guess that makes Ohio a “B” state?
Keith Bishop notes in response: Many states have adopted “other constituencies” statutes. For example, Nevada provides in NRS 78.438(4) that both directors and officers, in exercising their respective powers with a view to the interests of the corporation, may consider the interests of other constituencies (and Florida has this proposal with the SEC to create new Rule 5122, which would require broker-dealers engaged in private placements to make certain disclosures in the private placement memorandum, file the PPM with FINRA and commit at least 85% of the offering proceeds to the business purposes identified in the PPM.
FINRA published an initial version of this rulemaking initiative in NASD Notice to Members 07-27 – the new proposal has not significantly changed from the initial version, but provides additional clarity and extends the list of exemptions.
Last week, Senator Arlen Specter reintroduced his attorney-client legislation in the form of the “Attorney Client Privilege Protection Act of 2008,” whose Senate bill remains S.186 (the ’08 version text of the bill is not yet available; but I believe it’s the same as ’07). Supporting the bill, 36 former federal prosecutors wrote this letter to Senator Leahy.
Already approved by the House, the bill would prohibit federal prosecutors and agencies – including the SEC – from requiring companies to produce privileged documents in exchange for leniency, but companies would still be able to voluntarily waive privilege under the bill. Here is a New York Times article on the bill – and here is a press release from the Association of Corporate Counsel supporting it.
Nasdaq’s Master Index of Interpretative Letters
As mentioned during last week’s “Nasdaq Speaks” webcast, the Nasdaq Staff recently posted a “master index” of their interpretative letters. It should make it easier to search for their letters…
ESOARS in Flux
The battle over ESOARS continues – the latest missives about them from the CII and Zions Bancorp to the FASB’s Emerging Issues Task Force are posted in our “ESOARS” Practice Area. These letters were written because the EITF published guidance in March that seemingly undercuts the SEC’s plan to see how ESOARS fare in the open market.
Yesterday, the Delaware Supreme Court accepted the questions certified to it by the SEC relating to the battle between CA and AFSCME over the proponent’s binding bylaw proposal seeking reimbursement for third-party solicitations. The Court sure didn’t lose any time taking the case – and look at the quick briefing and argument schedule they have set (given CA’s mailing date is July 17th, this was necessary): briefs are due on Monday, July 7; oral argument is scheduled for July 9. We will have a guest blogger giving us news live from the hearing.
SEC Announces “21st Century Disclosure Initiative”
Last week, the SEC revealed a long-standing project – dubbed the “21st Century Disclosure Initiative” – that now will be conducted by a team led by Dr. Bill Lutz. Corp Fin has been quietly working on this project for several years.
It’s a pretty far-ranging project where anything could happen; for example, the notion of forms being required is up-for-grabs (see IR Web Report for more). The idea is to rethink the entire disclosure framework in the wake of new technology and changes in investor needs; a clean slate to envision how the reporting framework would be created if today were ’33 and ’34.
The first part of this study is expected to be completed by the end of this year, with a “blueprint” of a new framework being the ultimate goal. This is pretty interesting stuff. I can’t help but chuckle because a decade ago, the “Aircraft Carrier” was widely panned as trying to take on too much at once…
SEC Chairman Cox Responds to WSJ Criticism
I hadn’t planned on blogging about the scathing criticism of SEC Chairman Cox in this WSJ article – that delves into details of where the Chairman was during the Bear Stearns crisis, etc. – but I can’t help it now that a response of the Chairman to the SEC Staff was the subject of this CFO.com article.
Did the Chairman’s office provide a copy of his internal memo to CFO.com? If so, as someone who served in Congress, I would expect thicker skin if the “internal” memo was indeed leaked by the former Representative from California.
Our July Eminders is Posted!
We have posted the July issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
On Friday, Corp Fin Director John White said that the Staff was working to put this year’s batch of processed no-action requests related to Rule 14a-8 on the SEC’s website within the next few weeks. This will result in about 400 letters being posted (and I imagine will include all the correspondence related to the request as well as the Staff’s response). Going forward, the Staff is thinking about posting letters closer to “real-time” rather than waiting until the end of the proxy season.
Among other things that John discussed, he touched on:
– executive compensation review for this year, that I blogged about yesterday
– Section 16 and Form 8-K updates, that I blogged about Friday
– “21st Century Disclosure” project, that I will blog about manana
– proposal to modernize oil & gas reserve disclosures that just came out
– how the Staff intends to have all the Phone Interps updated by the end of the year
– how the Staff intends to review e-proxy results from this year and possibly take further action in the Fall
– “use of corporate website” guidance coming soon
– importance of the SEC’s IFRS rulemaking
– SEC’s credit rating proposals that came out recently
John White: Five Tips on Shareholder Proposals
Here is my paraphrasing of the five tips that John relayed from Corp Fin’s Shareholder Proposal Task Force:
1. Send in your no-action requests to exclude shareholder proposals sooner – so they get processed faster by the Staff and don’t get caught up in a crush of them that are received around Christmas time. Once the crush comes, turn-around times become longer.
2. Provide all correspondence from all proponents to the Staff when you submit your no-action requests.
3. Don’t assume that a Rule 14a-8(b) defect from a proponent one year will extend to the next; the proponent might have fixed the problem.
4. When making your arguments, don’t throw in the kitchen sink and argue points that are not likely to win the day. The Staff has to hassle processing all of those trivial arguments.
5. If a proponent withdraws its proposal, inform the Staff right away so they don’t bother processing it.
As always, it’s a good idea to read Staff Legal Bulletin #14 (and its progeny) when dealing with proposals – they really lay out the process and provide useful tips…
My Masterpiece: Conference Performance Art
Perhaps to prove that I have the power to bend a conference audience to my will, I had a little fun with my panel on executive compensation disclosure Saturday at the Society’s Annual Conference. See the first video after clicking the link below.
Here are the last of the videos I uploaded to the FriendFeed room I created (all videos are no longer than a minute):
– My Masterpiece: Conference Performance Art
– AFSCME’s Rick Ferlauto: SEC Certifying to Del. Supreme Ct.
– Lydia Beebe/Carol Strickland: Former Society Chairs
– Former Corp Fin “Masters of the Universe”
– Terry Helz on Membership Benefits
– Corp Fin Director John White: Lots of SEC Developments
– Francis Byrd, Dave Dixon, Ginny Fogg: Having Some Food
On Friday, the SEC Staff referred a shareholder proposal to the Delaware Supreme Court under a certification process we wrote about in the Nov-Dec 2007 issue of the The Corporate Counsel and discussed in this February podcast with a Delaware lawyer. The Delaware Constitution was amended last summer to create this process, allowing for greater cooperation between the SEC and Delaware Supreme Court on issues related to Delaware law. This is the first time that this new certification process is being used – the Delaware Supreme Court has the option to refuse the SEC’s request, but is unlikely to do so.
Submitted to CA (formerly known as Computer Associates) by AFSCME, the shareholder proposal would require – yes, its a binding bylaw proposal – the company to pay for the expenses related to a successful election of a short slate of directors. Submitted to several companies in each of the past three years, this type of proposal is AFSCME’s response to the stalled shareholder access debate; see this RiskMetric’s blog where Professor Charles Elson calls it the “ultimate solution” – and here is a 2006 WSJ article that portrays VC Strine as supporting a similar type of proposal.
In its no-action request to Corp Fin (among other exclusion bases), CA argued that, under Rule 14a-8(i)(1), the proposal is an improper subject under Delaware law and, under (i)(2), it would cause the company to violate Delaware law because reimbursement of solicitation costs is a decision for the company and its board. Both of these exclusion bases has a legal opinion requirement and Richard Layton was hired to provide one to support the company’s arguments.
AFSCME responded that its proposal doesn’t violate state law and Grant & Eisenhofer supported this argument with a legal opinion. Faced with dueling legal opinions, Corp Fin refused the exclusion request since the Division doesn’t resolve disputed questions of Delaware law – but also sent a request for certification to the SEC Commissioners, who approved certifying this question of law to the Delaware Supreme Court.
If the Delaware Supreme Court doesn’t weigh in timely, it appears Corp Fin won’t allow CA to exclude the proposal when it files and delivers its proxy materials on July 17th. Given the topic of the proposal, this is a huge development and one that may be resolved within a few weeks.
Here are the documents relating to this development:
Coming SEC Staff Review: On Friday, Corp Fin Director John White – who will keynote our Proxy Disclosure Conference, just like last year – said the SEC Staff will be conducting some form of executive compensation review – and a report of the Staff’s findings is likely sometime in the Fall. At this time, the Staff doesn’t know the form of either of these related projects. So executive compensation disclosure will continue to remain in the spotlight. [More notes from John’s remarks at the Society’s Annual Conference coming in tomorrow’s blog.]
On Friday, the US Senate confirmed three new SEC Commissioners – Luis Aguilar, Elisse Walter and Troy Paredes – meaning that Paul Atkins will now depart and the Commission has a full five members. As I blogged about before, it’s unprecedented to have three new Commissioners start at one time since the Commission was formed in ’34. Here is a statement from SEC Chairman Cox about the three nominees.
Alan Dye has already blogged on these on his “Section16.net Blog,” with more complete analysis coming up in “Section 16 Updates” in a week or so.
Society’s Annual Conference: Twelve Videos Posted
So far, I am the only person contributing to the Society’s FriendFeed room that I created – I’m not surprised given that it’s an experiment – and I’ve posted these 12 videos (each of them is no longer than a minute):
– Carl Hagberg & His Lifetime Achievement Award
– Carolyn Coffey on Conference Pilates
– Geoff Loftus on Latest in Society’s National Office
– Bob Woodward Luncheon Speech – Priceless
– Tom Kies & John Siemann: No Rap Song (Yet)
– John Truzzolino on Getting Involved in XBRL
– David Katz on Teaching the Youth
– Brian Lane on Meeting with SEC Staff
– Nicole Sanford on Technology Swat Team
– Jim Reda on Dealing with Advisors
– Welcome Reception – Society Conference
– Rapping with J&J’s Doug Chia
Thanks to these brave souls for trying this out. More than one person refused to be interviewed and I can’t say I blame them. But you only live once…
SEC Proposes to Amend Broker-Dealer Registration Requirements for Non-US B-Ds Working with US Investors
At Wednesday’s SEC open meeting, the SEC proposed amendments to Rule 15a-6, which provides an exemption from broker/dealer registration for non-US broker/dealers that conduct business with US investors. The proposals are not overwhelming, give that they incorporate many of the liberalized positions taken in SEC Staff no-action letters. We have started posting memos on this development.
How do you like that? I finally came up with a viable million dollar idea (probably many millions) and I’ve got too much on my plate to do something about it. So it’s free for the first taker!
I got the idea when I was reading a white paper by Glyn Holton, founder of the Investor Suffrage Movement, that describes a system that would let people who own shares of a company transfer the voting rights of their stock to other shareholders so investors with similar goals could establish a bloc of votes. Glyn has already conducted proxy transfer trials (Thanks to CorpGov.net publisher, Jim McRitchie, for alerting me to isuffrage.org).
In the white paper, Glyn envisions a world where soccer moms donate the voting rights of their holdings to their favorite charities. It sounded interesting, but not earth-shattering. But my antenna got raised when I got to a paragraph on page 18 that says “For example, the purchase and sale of voting rights raises public policy issues, so an exchange should not facilitate such transactions.”
Hmm, voting rights have been sold for decades, but typically in one-off transactions to facilitate a deal. What if someone created an online marketplace where voting rights could easily be bought and sold? It could even be in the form of an auction where management and a third-party bid up the price.
Taking it a step further: what if a retail holder checked a box when they opened a brokerage account indicating that their broker should routinely sell the voting rights of their holdings until they instruct otherwise. The proceeds from the annual sale of a particular batch of voting rights would be deposited in their account.
All of this would lead to exchanges listing the latest prices for voting rights for specific securities – and then derivatives could be created on top of that. This all sounds pretty crazy – but is it? It’s potential impact dwarfs that of shareholder access.
I’m sure there are legal issues up and down the board that I’m not aware of. Let me know what you think. And if you take this idea and run with it – think of me from your yacht. Remember that I’m not saying whether something like this is good for the market and for boards or investors. I’m just throwing it out there as some possibility that could cause a whole lot of change…
Dissecting ProxyDemocracy.org
This one is about one of those things that I swear I’ve blogged about before – but it was all in my mind. When I’ve been out speaking about e-proxy, I point to ProxyDemocracy.org as an example about how the playing field is changing. Founded by Andy Eggers of Harvard’s Department of Government, the site is a free resource where one can more easily analyze the voting track record of mutual funds. As you might recall, the SEC adopted rules a few years ago that requires mutual funds to report their votes for the year. However, the way the information is required to be reported is hard to decipher (eg. Fidelity files more than 100 of these forms). This site organizes the information from those Form N-PXs.
The site has other features, including alerts as to how the big institutional investors intend to vote (if those investors decide to announce what their intentions are, as they are permitted to do under the SEC’s proxy rules – see note below). So the site makes it easy for anyone to vote, by reducing the time they need to spend on detailed analysis of issues and candidates. And this is just the start – you can easily envision a path where this site and others do much more to facilitate the information gathering process and present it in a much easier way than currently available in a way that may eventually impact the results of annual meetings.
Anyways, I waited so long to blog about this development that Andy has blogged about it himself on Harvard Law School’s Corporate Governance Blog and in his own blog.
Under Rule 14a-l(1)(2)(iv), shareholders are permitted to publicize their voting intentions – as well as the reasons behind the intentions – without it being deemed a “solicitation.” Today, not many shareholders take advantage of this exemption to announce their intentions – CalPERS and a handful of others – so this feature doesn’t hold much value. If more shareholders start making announcements, then it will become a more important aspect of the site.
SEC Proposes to Delete References to Credit Ratings
Yesterday, the SEC held an open Commission meeting to propose – jointly from three Divisions, Trading & Markets, Corporation Finance and Investment Management – changes that include replacing references to ratings by Nationally Recognized Statistical Rating Organizations (ie. NRSROs) with alternative qualitative standards. This follows another proposal from several weeks ago related to regulation of the ratings process. Here is a statement from the Corp Fin Staff and Chairman Cox’s opening remarks from the open meeting (and a WSJ article). The SEC’s related press release is not out yet – we will be covering this topic more in the coming weeks.
Recently, Senator John McCain has been speaking out against excessive executive compensation and has now joined Senator Obama in calling for mandatory “say on pay.” Here is a Business Week article about this – and here is an excerpt from McCain’s June 10th speech:
“Americans are right to be offended when the extravagant salaries and severance deals of CEOs … bear no relation to the success of the company or the wishes of shareholders,” says McCain, adding that some of those chief executives helped bring on the country’s housing crisis and market troubles. “If I am elected president, I intend to see that wrongdoing of this kind is called to account by federal prosecutors. And under my reforms, all aspects of a CEO’s pay, including any severance arrangements, must be approved by shareholders.”
The proposals that both Senators Obama and McCain support not only would provide shareholders an annual non-binding vote on executive pay, they would also provide shareholders with a separate non-binding vote when a company gives a golden parachute to executives while simultaneously negotiating to buy or sell the company.
With H&R Block joining the list, there are now nine companies that have agreed to a non-binding vote on pay.
Quick Survey: How R&D Intersects with Setting Bonus Amounts
On CompensationStandards.com, we have posted this quick survey to learn more about how research & development costs play a role when it comes time to set bonus levels for senior managers.
This survey was suggested by a doctoral student who is conducting research to gain additional insight into some of the practical issues and challenges faced by those in charge of setting and disclosing executive pay. If you ever have survey ideas, please drop me a line.
Board-Shareowner Communications on Executive Compensation
RiskMetrics is not the only entity seeking comments on a paper. Stephen Davis is looking for input on this Millstein Center paper: “Board-Shareowner Communications on Executive Compensation.” The 17-page paper – which is an executive summary and initial findings – presents findings of a six-month research project that included interviews with directors, senior managers and investors on their views of dialouge regarding executive pay. A final paper will be published once more input is received.
Logically, the “say on pay” movement is addressed in the paper. Given that the media contains reports that some investors are now rethinking their views on “say on pay,” some of the research might be dated already, even though it’s not that old. I personally talked to some investors who now find themselves on the other side; and I find myself leaning against it for now (as I have blogged about). So please send Stephen your comments.
On pages 6-7 of the paper, there is this finding related to say on pay:
Compulsion, through crisis or other acute events, is the foundation under most current US corporate initiatives to foster governance dialogues with institutional owners.
Evidence suggests that scandals over executive compensation – whether payouts for failure or backdating stock options – were key contributors in 2007 in motivating certain boards to increase their interaction with shareowners. Exercises in board dialogue on governance have generally not come about in the United States as a product of proactive, long-term strategic outreach by untroubled corporations. This reality has contributed to growing investor conviction that regular dialogue will not spread widely in the absence of compulsion, even where companies are troubled. As a result, many funds back a UK-style annual advisory vote on executive pay policies, a measure that helped open channels of communication between UK boards and their equity owners.
The Consultants Speak: How the Latest Compensation Disclosures Impacted Practices
