A few weeks ago, CFO.com ran this article about how the SEC held up approval of FASB’s budget for four-plus months until the accounting standards-setter agreed to give the SEC more say over the appointment of FASB members. Jack Ciesielski fleshes this story out more in his “AAO Weblog.”
Here is a blurb from a member: “Under Section 109 of Sarbanes-Oxley, for the first time, the SEC arguably has the authority to set the pay of FASB Board members. I say “arguably” because some believe that Section 109 doesn’t specifically provide the SEC with the authority to approve the budget of the “standard setting body” (ie. the FASB) for two reasons: (1) SOX recognized the existence and role of the Financial Accounting Foundation in approving the budget of the FASB; and (2) SOX was intended to maintain the then-current level of independence of the FASB from the Commission. If, as a number of recent articles have suggested, the SEC refused a 2007 pay raise for FASB Board members that had been previously approved by the FAF (which is FASB’s parent unit), the SEC’s actions could be seen as inconsistent with the language and intent of Section 109.”
I have no unique insight into what really is happening here, but bear in mind that all of the FASB board members, with perhaps the exception of academics, can make much more money in the private sector than at the FASB…so any shenanigans would likely scare off the most qualified candidates to sit on the FASB Board.
Whole Lotta Internal Controls
Yesterday, there were three new internal controls developments:
SEC Deputy Chief Accountant Warns of FAS 159 Fair Value Arbitrage
In FEI’s “Financial Reporting” Blog, Edith Orenstein does a great job analyzing this recent speech by SEC Deputy Chief Accountant James Kroeker about principles-based accounting. Jack Ciesielski also analyzes the speech in his “AAO Weblog.” More on this topic soon…
This recent Jim Drury study (posted in our “Board Composition” Practice Area) found that there has been a 53% decline in outside board service by Fortune 500 CEOs over the last 16 years – and that these CEOs have reduced the average number of outside boards they sit on from 2.2 boards to 1.4 boards, representing a decline of 36%. True that the study’s time period is a bit long in the tooth, but it reflects a clear recent trend of CEOs cutting back on outside board service. “Overboarding” is not nearly the hot governance issue it was just two years ago.
The study’s results were analyzed in a Chicago Tribune article last month. Although fewer CEOs on boards can justifiably be viewed as a “brain drain” as CEOs often are among the best at formulating strategy (and best at understanding and evaluating a CEO’s job performance), I also think the views expressed by Nell Minow in the article hold some water. Nell believes that these statistics are good news because CEOs often are too busy to provide the oversight and guidance needed (and can be overly deferential to a fellow CEO, particularly when it comes to executive compensation).
I doubt this trend will ever reverse itself in the wake of recent “governance enlightenment.” I simply can’t envision any CEO having sufficent time available to serve on more than one outside board and meet their director obligations adequately, given the hundreds of hours necessary each year to attend and prepare for board meetings, committee meetings, etc.
The Inconvenient Location for an Annual Shareholders’ Meeting
As most proxy season observers know, one of the oldest tricks in the book for defusing angry shareholders is to hold the annual stockholders’ meeting in some far-flung location, as noted in this recent WSJ article. I’ve blogged about this topic once in a blue moon (or left comments on other blogs).
With the growing importance of annual shareholder meetings – due to the majority vote movement and the potential elimination of broker non-votes in director elections – I believe it’s simply too risky from an investor relation’s perspective for any company to hold their meeting at an inconvenient location. It’s only a matter of time before some bright journalist starts an annual “Top Ten Inconvenient Locations” list. Trust me, no one wants to experience the heat that Home Depot did for its various annual meeting snafus last year…
By the way, even though it’s a few years old, this webcast transcript regarding “Conduct of the Annual Meeting” is still a gem, loaded with practical guidance.
TIAA-CREF’s Policy Changes
One of the first institutional investors to draft model governance guidelines, TIAA-CREF, recently released the 5th edition of its closely followed “Policy Statement on Corporate Governance.” This policy statement provides TIAA-CREF’s governance philosophy and strategic priorities, as well as calls for majority voting for directors, expanding the definition for director independence beyond those mandated by the exchange standards, shareholder access and enhanced executive compensation disclosure.
I recently caught up with John Wilcox, Senior Vice President and Head of Corporate Governance of TIAA-CREF, to learn more about the policy changes in this podcast, during which John covers:
– Why did TIAA-CREF revise its governance policies at this time?
– What changes were made in the executive compensation area?
– Where does TIAA-CREF come out on the majority vote and shareholder access issues?
– Where any other significant changes made?
Yesterday’s WSJ included an article that states that the SEC is exploring a new policy that could permit companies to resolve complaints by aggrieved shareholders through arbitration, limiting shareholders’ ability to sue in court. FEI’s “Financial Reporting” Blog goes into more detail about this interesting proposition.
North Dakota Races to the Top for Shareholders
From Jim McRitchie’s CorpGov.net: North Dakota Governor John Hoevenhe signed into law the most shareholder friendly incorporation provisions in the United States. Among the most significant provisions of the new law are the following:
– Majority voting in election of directors – In an uncontested election of directors, shareholders have the right to vote “yes” or “no” on each candidate, and only those candidates receiving a majority of “yes” votes are elected.
– One year terms for directors
– Advisory shareholder votes on compensation reports – The compensation committee of the board of directors must report to the shareholders at each annual meeting of shareholders and the shareholders have an advisory vote on whether they accept the report of the committee.
– Proxy access – The corporation must include in its proxy statement nominees proposed by 5% shareholders who have held their shares for at least two years.
– Reimbursement for successful proxy contests – The corporation must reimburse shareholders who conduct a proxy contest to the extent the shareholders are successful. Thus, if a shareholder conducts a proxy contest to place three directors on a corporation’s board and two of the candidates are elected, the shareholder will be entitled to reimbursement of two-thirds of the cost of the proxy contest.
– Separation of roles of Chair and CEO – The board of directors must have a chair who is not an executive officer of the corporation.
– A “special meeting” shall be held if demanded by shareholders owning 10% or more of the voting power.
Chapter 10-35 of the North Dakota Century Code gives companies a choice, after July 1, 2007, to be subject to the new law by including a provision to that effect in their articles of incorporation. North Dakota only has two publicly traded companies chartered in the state, Dakota Growers Pasta, and Integrity Mutual Funds of Minot. (“Most support corporate governance option,” in-forum.com, 3/5/07).
The 2007 Romeo & Dye Section 16 Deskbook
A few weeks ago, the 2007 Romeo & Dye Section 16 Deskbook was mailed. This critical resource is essential for anyone working with Section 16 – try a no-risk trial to the Romeo & Dye Section 16 Annual Service to receive a copy of the Deskbook immediately.
On Friday, this Washington Post article noted: “The SEC is changing how it negotiates settlements with companies in a way that could reduce the number and size of financial penalties that businesses pay, current and former officials said yesterday.
Under the change, which has not been made public, SEC enforcement lawyers must seek approval from the agency’s five commissioners before they begin settlement talks that involve fining corporations, including seeking ranges for possible fines. Currently, staff members have the authority to negotiate with businesses and draft settlements in principle before they take the deals to the agency leaders for final approval.
The shift marks the latest development in a heated debate over whether companies or individual wrongdoers should bear the brunt of blame for legal violations. Penalties reached record proportions after destructive scandals at Enron, WorldCom and Adelphia Communications, creating concern among some commissioners that enforcement staff members are overreaching.
The initiative comes at the behest of SEC Chairman Christopher Cox, a former Republican lawmaker from California who is striving to avoid split votes at the agency. The pilot program will affect a relatively small percentage of cases and will result in more productive and fast-tracked negotiations between business and enforcers, according to spokesman John Nester. The plan, Nester said, “will increase investor protection because it will give our enforcement division a stronger hand in settlement negotiations.”
The enforcement division was criticized by trade groups last month as “adversarial” and “overly punitive.” Republican Commissioner Paul S. Atkins has argued that imposing fines against businesses in many circumstances unduly penalizes their stockholders. Rather, he and allies say, corporate executives who broke the law should pay the price.
Disagreement over the issue has slowed resolution of several cases, including some involving more than 160 companies that engaged in backdating of stock options for officials and employees. For example, staff members are continuing to deliberate whether Brocade Communications Systems, whose former chief executive was charged last year with criminal fraud, must shell out money for backdating offenses.
After months of behind-the scenes negotiations, Cox unveiled a policy statement in January 2006 laying out analytical steps the SEC would follow in deciding whether to levy penalties against businesses. Since then, the commission at times has sent the enforcement unit back to the drawing board in cases against Veritas Software and MBIA, among others, frustrating businesses and defense lawyers who seek quicker resolution of investigations.
The new policy on settlements is designed to prevent disconnects between SEC staff members and the commissioners. But the change is also contributing to lowered morale within the enforcement unit, which swelled in financial resources and prestige after widespread accounting frauds came to light five years ago.
Since that time, the enforcement budget has flattened and the U.S. Chamber of Commerce, the nation’s largest business lobby, has called on SEC leaders to appoint an advisory panel to scrutinize the enforcement division’s fairness.
Some staff members are balking at the change as a show of distrust in their judgment and another layer of red tape that could reduce the frequency and the size of financial penalties. But officials asserted yesterday that Cox and enforcement unit leaders are on the same page. Details of the plan continue to be worked out, agency officials said.”
Milestone: US-Style Litigation Now in Europe?
Last week, members of the US plaintiff’s bar made $47 million in legal fees from the second largest securities fraud settlement in Europe. Here is a press release from the lead plaintiff firm, Grant & Eisenhofer.
And here is more from the “Rule 10b-5 Daily“: Royal Dutch Shell p.l.c. has announced a landmark settlement with non-U.S. shareholders resolving claims related to the company’s recategorizations of certain proved oil and gas reserves. Under the settlement, which was executed pursuant to a new Dutch statute allowing the Amsterdam Court of Appeals to declare binding a collective resolution of a commercial dispute, Shell will pay $352.6 million plus administrative costs to shareholders who bought on non-U.S. exchanges and were resident or domiciled outside the U.S. from April 1999 to March 2004. The parties have also requested that the $120 million Shell paid to the SEC in a related settlement be distributed in a non-discriminatory manner among certain U.S. and non-U.S. shareholders.
Shell also announced that it plans to extend the same proportional settlement offer to shareholders who bought in the U.S. or were resident or domiciled in the U.S. during the same period. According to the press, it is the second-largest settlement of a securities fraud dispute by a European-based company, behind Royal Ahold’s $1.1 billion settlement in late 2005. Media coverage can be found in the Wall Street Journal, Bloomberg, and the New York Times.
Transcript: SEC’s Internal Controls Open Commission Meeting
The SEC has posted a 126-page unofficial transcript of its April 4th open Commission meeting devoted to internal controls.
As this Washington Post article notes, the first “say on pay” shareholder proposals were voted on this week: 47.3% of shareholders supported the proposal at the Bank of New York and 37% at Morgan Stanley. These are very high numbers for a first-time-like type of proposal.
This ISS article lists upcoming annual meeting dates for other major companies that will include “say on pay” on their ballots. Overall, over 60 companies will have shareholders vote on this issue sometime this year. Last year, there were 7 of these proposals, averaging a 40% level of support.
The ISS article also recaps the recent ISS webcast about how “say on pay” has worked in other countries that have tried it. You can still listen to the audio archive or access a transcript of that webcast via a free registration.
Internal Pay Equity: Pay “Cap” is a Misnomer
On this recent CNBC “On the Money” segment, I thought Professor Charles Elson does a pretty good job of explaining the difference between internal pay equity and pay “caps.” Remember that internal pay equity is just an alternative benchmark to using traditional peer group surveys. Internal pay equity is no more of a “cap” than those ubiquitous peer group surveys are…
Internal Pay Equity: In Practice
I’ve been reviewing recently filed proxy statements and happy to note that several hundred mention that boards have considered internal pay equity when setting CEO pay levels. However, very few of these companies provide any details about (or if) they really use this methodology as an alternative benchmarking tool.
We are in the process of setting the agenda for our “4th Annual Executive Compensation Conference,” which is being reconfigured this year to ensure we provide as much practical guidance as possible. We are planning to include a panel on internal pay equity that includes a number of panelists from companies that have used internal pay equity so they can explain how they do implement it. If you are from one of those companies, can you please drop me a line, even if you are unwilling to speak? My email address is broc.romanek@thecorporatecounsel.net. Thanks!
With many companies about to hold their annual shareholder meetings, check out this timely podcast in which Andrew Gerber of Hunton & Williams gives tips on how to interact with shareholder proponents at annual meetings, including:
– What do you do if the proponent doesn’t show up to present their proposal?
– What if the proponent sends someone else to present their proposal?
– If the proponent shows up to present their proposal, but yet stands up and starts talking about another topic – how should you handle it?
A Evelyn Y. Davis Sighting!
A few weeks ago, Evelyn was on CNBC’s “On the Money” – here is an archived video of that appearance. And here is a humorous blog entry from someone who doesn’t appear to be fan of Evelyn’s.
As some of you undoubtedly know firsthand, Evelyn is still very active, meaning this tombstone was created prematurely. Evelyn made this tombstone years ago, which is evident from the photo because her third divorce was inscribed after its initial creation – it now will have to be further updated to list her fourth divorce, as I hear that her most recent marriage didn’t take…
Private Offering Reform
At recent conferences, Corp Fin Director John White has indicated that some reform of the private offering process might be on the Division’s agenda, although he also noted that any action would not involve a comprehensive overhaul of the private offering rules. The ABA’s Subcommittee on Securities Registration recently sent this 40-page letter to the SEC with detailed suggestions about what might be reformed.
[Cheap Gas Prices – I know some people love to get a deal on gas for their car (I’m driving a Prius so I never have to fill the tank, but I have relatives who take great pride in obtaining the cheapest gas available). If this is you, just enter your zip code on this web site – and it will tell you which gas stations have the lowest prices (and the highest) on gas in your area. The site claims that it’s updated every evening. ]
From Mike Melbinger’s “Compensation Blog“: Apologies to those not old enough to have seen Spielberg’s Poltergeist in 1982 (and, thus, don’t understand this reference), but something really scary happened today. The IRS published its long-awaited final regulations (397 pages) under new Code Section 409A. This is a significant event for every employer in America because employers now have until the December 31, 2007 deadline to take a series of required steps.
In the upcoming days and weeks, I will be highlighting the most significant issues and requirements under the final regulations. However, the first step for most employers and their counsel is to determine the impact of the new rules on their plans, programs and agreements. Remember, these regulations can apply to employment and change in control agreements, severance plans and even equity compensations plans, in addition to deferred compensation plans, which were the original target of Congress.
Tomorrow! NASPP Webcast: The IRS and Treasury Speak about the New 409A Regulations
Talk about good timing! Catch the NASPP webcast tomorrow – “The IRS and Treasury Speak: Mid-Year Tax Update” – to hear representatives from the IRS and the US Department of Treasury, along with two former Treasury employees, talk about the new 409A regulations. The panel includes:
– Stephen Tackney, Senior Attorney, IRS, Office of Chief Counsel
– Daniel Hogans, Attorney Advisor, US Department of the Treasury
– Elizabeth Drigotas, Partner, Deloitte
– Deborah Walker, Partner, Deloitte
We are saddened to have learned of the recent deaths of two former SEC Commissioners – J. Carter Beese, Jr., who served from 1992 to 1994 and more recently was a venture capitalist; and James Needham, who served from 1969 to 1972 and became the first full-time, salaried chairman of the New York Stock Exchange.
I had the pleasure of meeting Carter several times and the guy was quite a character with a very sharp wit. He was among the youngest Commissioners to ever serve; he was only in his mid-30s when he sat on the Commission.
It’s that time of the year: CEO pay in the news. Yesterday’s WSJ included its annual executive pay report, with multiple pay-oriented articles – and this Sunday’s NY Times included a number of articles on executive pay, including this special report that analyzes the recent trends – and this article that focuses more on the lack of clarity in recent disclosures. Another article analyzed the independence of compensation consultants – and there was an article on severance pay.
The NY Times even included an article about how to calculate the pay figures, which is no easy task. Bob Hayward of Kirkland & Ellis recently put together the following memo, which does a great job of describing how AP is calculating numbers for its media articles:
As more and more companies have been filing their proxy statements under the new SEC executive compensation disclosure rules, it has been interesting to observe how the media interpret and report the disclosures. For example, the Associated Press – a wire service that is often relied upon not just by local and regional newspapers but also by the Wall Street Journal, other national newspapers and Internet websites (such as Yahoo! and MSN) – is not simply copying the “total compensation” number out of proxy statements, but is trying to take a more reasoned approach to what it discloses in news reports about executive pay.
The AP calculation of “total pay” is not the same as the SEC’s calculation of “total compensation.” Total compensation under the SEC’s rules is the sum of the following categories in the Summary Compensation Table: Salary; Bonus; Stock Awards; Option Awards; Non-Equity Incentive Plan Compensation; Change in Pension Value and Nonqualified Deferred Compensation Earnings; and All Other Compensation.
However, the AP’s calculation only includes “Salary,” “Bonus,” “Non-Equity Incentive Plan Compensation,” “All Other Compensation,” above-market returns on deferred compensation (but not actuarial change in pension value) and the “estimated value” of stock and option awards. AP uses the FAS 123R grant date fair value of the stock and option awards (which is found in the last column of the Grant of Plan-Based Awards Table) and not the financial accounting compensation expense shown in the SCT under the Stock Awards and Option Awards columns.
The AP has indicated that it is trying to show a more realistic picture of what an executive was offered during a given fiscal year and to create parameters that permit better comparability between peer companies. Although using the grant date fair value as the “estimated value” of stock and option awards still overstates the amount of compensation (because such awards are likely subject to time- and/or performance-based vesting), the AP reported amount is a closer indicator of how much an executive was offered in a given fiscal year than is the SEC’s total compensation amount. Some (but not all) local and regional newspapers are following the AP or a similar formulation. Because it is the local papers that usually focus most intensively on hometown executives, it is important that the PR staff at the company understand the AP formulation and why in many cases they may want to encourage the local or regional newspaper to follow it.
Investors, the SEC, the public, employees and activists often obtain their initial information about executive compensation from “sound bites” in news stories. Although companies can make CD&A and the narrative disclosure accompanying the tables as clear as crystal, the key talking points may still get lost in the reporters’ rush to get the story out. Because all reporters have deadlines, it is critical that companies be proactive with the media on the day the proxy statement is filed. It appears that most of the AP and local reporters have been generating their stories on the very day proxy statements have been filed with the SEC.
Below are five points to consider as part of your proxy PR planning process:
1. Brief the PR staff – Prior to releasing the proxy statement to the public, brief the company’s PR staff on the key talking points and educate them about the numbers disclosed in the various compensation tables. The PR staff should develop a well-informed talking points agenda that is consistent with the information disclosed in the proxy statement.
2. Don’t be naive; be proactive – Expect the AP (and most likely the local paper) to report on the compensation disclosed in the company’s proxy statement. If you want the story told right, open the lines of communication with the media. Most reporters welcome a phone call from a well-informed PR executive who can explain the numbers and any nuances. For example, one company was recently required to report a “super-charged” level of equity compensation in the SCT for a retirement-eligible executive solely as a result of accounting rules.
Although the CD&A and narrative disclosure discussed the accounting rules were causing the anomaly, it was the PR executive’s conversation with the reporter — focusing him on the key messages in the proxy statement — that convinced the reporter to indicate in the article that the new SEC rules forced the company to disclose the “super-charged” amount and that such amount was not actually received. Making sure the key messages are adequately described in the proxy statement will assist the PR staff in focusing reporters on the overarching messages.
3. Don’t neglect the footnotes – Clear disclosure in the CD&A and the narrative disclosure accompanying the tables is important, but reporters only have time to skim the tables and footnotes (especially since many proxy statements are much longer this year). If you want to make an important point, make it in CD&A and the narrative disclosure but also add a footnote next to the likely headline-generating number in the table. This will flag the key point for the reporter and direct him or her to the more descriptive disclosure found elsewhere in the proxy statement.
4. Sensitize the compensation committee and board on what the media may report and why – Many compensation committees have expressed frustration that the new SEC rules obscure how the compensation committee (and its consultant) look at compensation for a given year. Being proactive with the media on the day the proxy statement is filed will go a long way to address this frustration.
5. Compile, study and learn – Once the company’s proxy statement is on file with the SEC, collect every news story written about the proxy statement and the information disclosed therein. Determine what key messages were missed or distorted by the media and formulate a game plan on how to address those deficiencies next year.
AFL-CIO’s 2007 “Paywatch” Website
For over a decade, the AFL-CIO has maintained a “Paywatch” website that included a calculator that would allow workers to compare their pay to the CEO’s pay at their company. Recently, the AFL-CIO updated the Paywatch site for 2007, including new case studies regarding severance packages, options backdating, etc.
Houses of Glory, Mansions of Shame: CEOs’ Homes and Corporate Performance
On the “D&O Diary” Blog, Kevin LaCroix does a nice job of waxing about a recent study from Crocker Liu of the Arizona State University Business School and David Yermack of the NYU Business School entitled “Where Are The Shareholders’ Mansions? CEOs’ Home Purchases, Stock Sales, and Company Performance.”
With CD&As rolling in and being a focal point for SEC Chairman Cox (see Mark Borges’ take on the Chairman’s speech), we have posted a survey to gauge who drafted the first draft of the CD&A – as well as how many hours were spent preparing and reviewing the CD&A by different categories of personnel.
Please take a moment to fill out the survey – I promise it will take less than a minute! So far, over 375 people have responded…
Survey Results: Director Resignations
Under at least two scenarios these days, a director may be required to submit a resignation letter – either when the company’s corporate governance guidelines require it when a director has a change in his/her job responsibility or as part of a majority vote provision. Below are survey results from the questions recently posed in this area:
1. If a director resignation scenario arises, the process our company uses to obtain the letter involves:
– Corporate secretary or general counsel reminds the director of the need to submit the resignation letter – 68.4%
– Board chair or governance committee chair reminds the director of the need to submit the resignation letter – 15.8%
– Full Board reminds the director of the need to submit the resignation letter at a board meeting – 0%
– Nobody reminds the director of the need to submit the resignation letter – 10.5% [ed. note: yikes!]
– Other – 5.3%
2. After a director resigns, the process our company uses as part of an “exit” interview – and to ensure that a Form 8-K under Item 5.02(a) is not required – involves:
– Board meets in executive session without the “resigning” director – 5.3%
– Board chair meets with the resigning director – 21.1%
– Nominating/governance chair meets with the resigning director – 15.8%
– CEO meets with the resigning director – 15.8%
– General counsel meets with the resigning director – 31.6%
– Corporate secretary meets with the resigning director – 0%
– Other – 15.8% [ed. note: I wonder what constitutes “other” here; please shoot me an email if you know.]
“The Dog Ate It” Excuse: Ain’t Got Nothing on Amnesia!
Before I left on vacation, I blogged about a company that made plenty of excuses for a late filing. Now that I am back in the saddle, I see that I missed an SEC enforcement action on Thursday regarding an investment advisor who can’t account for $134 million – due to his alleged amnesia! Genius!
As this Washington Post article notes, the implicated South Carolina professor is known for his flamboyant suits and million-dollar pen collection…
This week, there has been two articles on the topic of foreign policy interfering with capital market regulation, one in the Wall Street Journal and the other in the Financial Times; the latter, which blames Chairman Cox before he joined the SEC, is discussed in Werner Kranenburg’s blog.
TV Special: “Sarbanes-Oxley: Five Years Later”
Tune in tomorrow night on PBS stations for a Nightly Business Report “holiday” program: “Sarbanes-Oxley: Five Years Later.” A little odd I confess, a special holiday program about Sarbanes-Oxley…but I’m definitely stoked that the “Special Features” for this program includes a link to this blog!
