A few weeks ago, Rep. Henry Waxman (Ca.-D) sent letters to a number of compensation consultants seeking information about potential conflicts, ahead of a likely hearing on the topic. Here is an excerpt from a recent NY Times article:
“Members of Congress are looking into the potential conflicts among executive compensation consulting firms that do other lucrative work for the companies whose pay they help devise. The chairman of the House Committee on Oversight and Government Reform has asked the largest companies in the industry for details on their client relationships and the revenues these ties have generated over the last five years.
The companies — Hewitt Associates; Mercer Consulting, which is a unit of Marsh & McLennan; Towers Perrin and Watson Wyatt Worldwide — confirmed yesterday that they had received a letter dated May 8 from Henry A. Waxman, the California Democrat who is chairman of the oversight committee.
Mr. Waxman asked the consulting firms to identify which companies among the nation’s 250 largest they had provided both executive pay consulting and other services for and to disclose total revenues received for each type of service. Mr. Waxman asked that the companies supply the information by May 29.”
Personally, I’m not convinced that these consulting conflicts are “real” since the folks that advise on exec comp are not the same as those that consult on other HR stuff (ie. general workforce pay, retirement and health benefits) within these consulting firms – but perception often can be as important as real conflicts. Of course, as noted in the D&O Diary blog, there can be instances where a consultant can be implicated in some shenanigans…
Executive Compensation Disclosure Proposal: Et Tu, Canada?
Last month, Canadian regulators proposed an overhaul of their executive compensation disclosure rules, including a new CD&A and a total column in their Summary Compensation Table. Similar to last year’s overhaul in the US, the Canadian proposal would be the first update of these rules since 1994. Learn more in CompensationStandards.com’s “International” Practice Area.
– Trends in the design and usage of stock options, restricted stock, performance-based awards, and ESPPs for overseas employees
– Changes in stock compensation for overseas employees as a result of 123(R)
– Worldwide participation in ESPPs and changes in these plans post-123(R)
– Policies and procedures for tax withholding on both stock options and restricted stock
– Common practices for monitoring compliance with local laws, grant documentation and employee education, and compliance with data privacy laws and the EU prospectus directive
And just yesterday, the SEC announced a roundtable of five SEC Chairs that will take place today. Not too much in the way of advance notice for this program – and the announcement doesn’t indicate what the topics will be (and this roundtable will convene at 5 pm, well after this morning’s open Commission meeting that includes 8 agenda items). The CFO.com blog speculates as to what the topics might be…
Glass Lewis suffered a blow when it was announced over the weekend that two of its key staffers – Lynn Turner and Jonathan Weil – have resigned (Jonathan has already left; Lynn leaves in two weeks). This article indicates the flap is over a dispute involving Glass Lewis’ parent company, China-based Xinhua Finance Media Ltd. The dispute revolves around inadequate disclosures regarding the Chinese parent’s CFO in the parent’s IPO prospectus (which has led to a class action lawsuit). This WSJ article indicates the flap is generally over the parent’s conduct (and the article raises questions about ISS’ and Glass Lewis’ new ownership; Glass Lewis’ parent went public last year and ISS’ parent may go public soon).
Lynn was the Managing Director of Research and a former SEC Chief Accountant and Jonathan was Managing Director and Editor of Financial Research and a former WSJ reporter who broke the Enron scandal wide open. I believe Barron’s first reported on this development in this article.
Nasdaq Seeks to Reestablish PORTAL as a 144A Trading Market
Recently, Nasdaq has filed a proposal with the SEC seeking to reestablish PORTAL as a facility for broker-dealers to publish quotes for qualified Rule 144A securities and trade these securities, among themselves and with QIBs.
This is similar to how PORTAL was originally intended to operate when it was launched many years ago. PORTAL never thrived as a marketplace – and NASDAQ’s current role with PORTAL (which it assumed when it separated from the NASD and commenced operations as a national securities exchange) is limited to the review of whether an issue of privately placed securities meets the eligibility requirements of Rule 144A. This role would change if the proposal is adopted.
A month ago, the Financial Times published this article: Financial regulators yesterday gave the first official recognition of intensifying City concern about the impact some overseas listings are having on the standards and reputation of London.
The Financial Services Authority said it will canvass opinions in the City about how to clarify the regulations to make clear whether companies have chosen light-touch listing methods, which can offer investors less protection. It said it was calling for formal debate about the balance between attracting new flotations and maintaining quality.
The decision comes a day after John Thain, chief executive head of the newly merged NYSE Euronext exchange group, took a thinly veiled swipe at the London Stock Exchange, criticising corporate governance and inadequate protection for minority investors offered by some Russian companies. There has been a steady flow of Russian and Kazakh companies seeking to raise capital in London.
The FSA’s decision to formalise an already rumbling debate followed private pressure brought to bear by a group of large shareholders this year. There are widespread worries among institutional investors about the ability of companies with weak corporate governance standards to raise capital on the LSE. In February, a group of important investors, including Hermes, Fidelity, State Street, Royal London, Barclays Global Investors and M&G, warned the FSA the quality of the market was under threat. “In a less benign [economic] environment some decisions being taken now might come back to haunt the regulators,” a fund manager told the FSA.
Hector Sants, managing director for wholesale business at the FSA, said new issues from non-traditional markets and European regulations designed to open up competition made it important to consider the balance: “This is a very important debate because of the changing nature of capital markets.” Peter Montagnon, head of investment affairs at the Association of British Insurers, said investors were concerned about confusion between different types of London listings. These include primary, with traditional corporate governance standards; secondary, which need no primary listing elsewhere and have minimum regulation; and global depositary receipts, only available to professional investors.
The LSE also operates the Aim junior market with weaker regulation. “There’s a risk of confusion here, and there’s a risk that if we are not careful we could sacrifice some of London’s reputation for quality and with it one of the reasons it is an attractive market,” he said. Even some investment bankers – who make large fees from listings – are concerned. A senior industry figure said: “Has it gone too far? Not yet, but we’re close.”
The LSE has been successfully promoting itself in Russia but is keen to head off investor criticism, which surfaced last year when several big groups attacked the listing of Rosneft, Russian oil producer. The LSE welcomed the debate. “We are particularly keen to have clear labelling of the different forms of listing, giving investors the choice but making sure it is very clear exactly what they are being given,” it said.
Google’s transferable option program has gone “live” and it’s readily apparent that Google and Morgan Stanley have put a great deal of thought into the program. The May-June 2007 issue of The Corporate Executive – which was just mailed – is dedicated to analyzing every aspect of this program, from the ’33 Act registration issues to the insider trading blackout issues, and much more.
Treasury Department Announces Accounting Industry Task Force
On Thursday, Treasury Secretary Hank Paulson announced the formation of a non-partisan task force, headed by former SEC Chair Arthur Levitt and former SEC Chief Accountant Donald Nicolaisen, to examine the world of auditing, including tackling key issues such as firm concentration and how to strengthen the industry’s financial soundness and enhance its ability to attract and retain qualified personnel. It sounds like the task force’s work won’t be done for at least a year; they won’t even begin deliberations until the Fall.
This task force serves as the first step in the Treasury Department’s capital market plan to enhance the US markets competitiveness. Hank’s plans were fleshed out in this Financial Times opinion column (which doubled as a Treasury press release).
A Mid-Season Proxy Review
If you’re wondering how various types of shareholder proposals are faring at the polls this proxy season, check out ISS’s “mid-season proxy review.”
From Lyle Roberts’ “10b-5 Daily” Blog: A recent decision by the U.S. Court of Appeals for the Second Circuit offers some interesting clarifications on the scope of accountant liability for securities fraud. In Lattanzio v. Deloitte & Touche LLP (2d Cir. Jan. 31, 2007), the court addressed whether Deloitte could be held liable for statements in audited and unaudited financial filings.
As to the company’s unaudited financial filings, the court found that Deloitte’s regulatory obligation to review the company’s quarterly statements did not turn those statements into accountant’s statements. Even if the public understood that Deloitte was engaging in these reviews, the accountant’s “assurances were never communicated to the public.” The court also rejected plaintiffs’ argument that the reviews created a duty to correct the quarterly financial statements if false and that a breach of this duty amounted to a misstatement by Deloitte. The court noted that there is a distinct difference between the duties and liabilities created by a review of interim financial statements and those created by an audit of annual financials.
As to the company’s audited financial filings, the court dismissed the relevant claims based on a failure to adequately plead loss causation. The court held that the “plaintiffs had to allege that Deloitte’s misstatements [in the company’s annual reports concerning accounts payable and inventories] concealed the risk of [the company’s] bankruptcy.” Given that Deloitte had issued a going concern warning – along with the disclosed (if understated) collapse in the company’s value – the risk of bankruptcy was apparent. Accordingly, the court found that the plaintiffs had not alleged facts showing that Deloitte’s misstatements were the “proximate cause of plaintiffs’ loss; nor have they alleged facts that would allow a factfinder to ascribe some rough proportion of the whole loss to Deloitte’s misstatements.”
Holding: Dismissal affirmed.
Quote of note: “Public understanding that an accountant is at work behind the scenes does not create an exception to the requirement that an actionable misstatement be made by the accountant. Unless the public’s understanding is based on the accountant’s articulated statement, the source for that understanding – whether it be a regulation, an accounting practice, or something else – does not matter.”
More on Auditor Liability
Recently, the Second Circuit reversed a lower court decision and held – in Overton v. Todman – that an auditor has a duty to correct prior certified opinions and may be held liable under Rule 10b-5 if it fails to do so. In other words, once an auditor knows their opinion is wrong, they ought to do something about it and tell people they should no longer rely on it. We have posted a copy of the opinion (and memos that analyze it) in our “Auditor Liability” Practice Area.
More specifically, the court holds that “an accountant violates the ‘duty to correct’ and becomes primarily liable under § 10(b) and Rule 10b-5 when it (1) makes a statement in its certified opinion that is false or misleading when made; (2) subsequently learns or was reckless in not learning that the earlier statement was false or misleading; (3) knows or should know that potential investors are relying on the opinion and financial statements; yet (4) fails to take reasonable steps to correct or withdraw its opinion and/or the financial statements; and (5) all the other requirements for liability are satisfied.”
This case appears to be the first in the Second Circuit to hold that an auditor has such a duty and may be primarily liable under the federal securities laws. The Second Circuit noted that its holding did not conflict with Central Bank of Denver v. First Interstate Bank of Denver, the 1994 Supreme Court case which held that there was no secondary aiding and abetting liability under Section 10(b), as the auditor in Overton had acted in a primary capacity.
PCAOB Report: The Auditors’ Duty to Uncover Fraud
Way back in late January, the PCAOB issued a report that discusses auditors’ implementation of PCAOB interim standards regarding the auditor’s responsibility regarding fraud. The PCAOB issued the report to nudge auditors to be more diligent about their responsibilities vis a vis uncovering fraud and providing information that audit committees may find useful in working with auditors.
In the report, the PCAOB notes a number of deficiencies in the performance of audits, where audit procedures required to enhance the detection of fraud have not been performed, or have failed to measure up to professional standards, not unlike problematic audits of the past – and the report provides a list of areas for audit committees to probe the auditor on regarding how a particular audit is being conducted.
[I’m on the road for a few days so I took the liberty of posting some blogs I had drafted long ago but had never posted…plenty more of those in the cellar.]
In addition to hosting two more proxy process roundtables next week, the SEC will hold an open Commission meeting next Wednesday with lots of Corp Fin stuff going on, including whether to:
1. adopt interpretive guidance for management regarding its evaluation and assessment of internal control over financial reporting
2. adopt rule changes that would make it clear that an evaluation that complies with the Commission’s interpretive guidance would satisfy the annual management evaluation required by those rules.
3. adopt rule changes to require the expression of a single opinion directly on the effectiveness of internal control over financial reporting by the auditor in its attestation report.
4. make rule proposals addressing the registration and disclosure requirements for smaller companies, as well as private offerings, including:
– increase the number of companies eligible for the scaled disclosure and reporting requirements for smaller reporting companies;
– expand the eligibility requirements of Form S-3 and Form F-3 to permit registration of primary offerings by companies with a public float of less than $75 million, subject to restrictions on the amount of securities sold in any one-year period;
– create exemptions from the registration requirements of the ’34 Act for grants of compensatory employee stock options by non-reporting companies;
– create a new Regulation D exemption for offers and sales of securities to a newly defined subset of “accredited investors,” as well as to propose revisions to the Regulation D definition of “accredited investor,” disqualification provisions, and integration safe harbor and to provide interpretive guidance regarding integration;
– make revisions to Form D and mandate electronic filing of Form D; and
– amend Rule 144 to revise the holding period for the resale of restricted securities, simplify compliance for non-affiliates, revise the Form 144 filing thresholds, and codify certain staff interpretations, as well as to propose amendments to Rule 145.
5. adopt rules to implement provisions of the Credit Rating Agency Reform Act of 2006
And according to this Washington Post article, the House Financial Services Committee hearing with the five SEC Commissioners testifying on whether they are too soft on business is likely to be held during the week of June 25th.
Next Thursday: PCAOB to Act on Internal Controls
Next Thursday, the PCAOB will vote on a new standard – Auditing Standard No. 5 – that will supersede the Board’s existing internal controls standard, Auditing Standard No. 2. The PCAOB also will vote on two recommendations to amend the Board’s rules on the frequency of inspections – to remove the requirement that the Board regularly inspect each registered public accounting firm that plays a “substantial role” in audits but does not issue audit reports and whether to keep Rule 4003(d) in place beyond the June 30, 2007, tentative sunset date. Neither amendment would affect the annual inspection cycle for firms that audit more than 100 issuers.
Yesterday, FEI published a summary of survey results showing that internal control costs for accelerated filers dropped 23% from 2005 to 2006 (and 35% since 2004, which was the first year of implementing Section 404). Audit fees were essentially unchanged between ’05 and ’06. This CFO.com article notes that audit fees could drop by 10% under new AS #5.
Posted: May-June issue of Deal Lawyers print newsletter
We have just sent our May-June issue of our new newsletter – Deal Lawyers – to the printer. Join the many others that have discovered how Deal Lawyers provides the same rewarding experience as reading The Corporate Counsel.
To illustrate this point, we have posted the May-June issue of the Deal Lawyers print newsletter for you to check out. This issue includes pieces on:
– Wake Up and Smell the E-proxy Coffee: Changes Ahead for Online Solicitations
– Lessons Learned: A Practical Look at the Caremark Trilogy
– Understanding the Real Meaning of Deal Certainty: Debunking a Few Myths and Suggesting a Few Solutions
– What’s in a Choice of Law Clause?
– Unauthorized Management Buyout Proposals: It’s Time to Reevaluate Corporate Policies
Try a no-risk trial today; we have special “Rest of 2007” rates, which includes a 50% discount – and a further discount for those of you that already subscribe to The Corporate Counsel. If you have any questions, please contact us at info@deallawyers.com or 925.685.5111.
Interestingly, Exxon Mobil has a new web page that facilitates the ability of shareholders to e-mail questions in advance of its May 30th annual meeting. There is a May 15th cut-off for shareholders to send their questions in. I don’t believe this is a first (IBM and BHP Billiton have done it before).
I’m not sure if many companies would be willing to encourage more questions, although it may be a way to get more diverse questions – or at least more questions related to the business of the company. But since Exxon Mobil doesn’t promise to answer all questions submitted, it doesn’t seem like there is too much potential for harm (from the corporate secretary’s and senior management’s perspective) and this type of web page provides another avenue to get potentially valuable shareholder feedback.
By the way, there is no mention in Exxon Mobil’s proxy statement that shareholders can e-mail the board because this particular function was only added to the website after the proxy statement was mailed. However, the following paragraph can be found on page 9 under “Shareholder Communications”:
“Electronic Communications: You may also send e-mail to individual non-employee directors or the non-employee directors as a group by using the form provided for that purpose on our Web site at exxonmobil.com/directors. These communications are sent directly to the specified director’s electronic mailbox. E-mail can be viewed by staff of the Office of the Secretary, but can only be deleted by the director to whom it is addressed. More information about our procedures for handling communications to non-employee directors is posted on the Corporate Governance section of our Web site.”
AFL-CIO’s Key Votes Survey
Last week, the AFL-CIO posted its 2007 AFL-CIO Key Votes Survey. This is a preliminary scorecard of how the AFL-CIO believes that shareholders should vote at selected shareholder meetings.
– This is the second time you’ve produced this study. What made you revisit it and were you surprised to see some of the same companies reappear?
– Did you find any new problems within compensation structure and policy with the new companies or was it the same old issues?
– What do you think can be done to solve some of these problems?
Come join us in San Francisco or via Nationwide Video Webcast for three special Conferences in mid-October:
– “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference” (10/9)
– “Hot Topics and Practical Guidance Conference: The Corporate Counsel Speaks” (10/10)
– “4th Annual Executive Compensation Conference” (10/11)
Among many other luminaries, the SEC’s John White, Linda Chatman Thomsen and Paula Dubberly will be speaking. Here is a combined agenda for the three conferences – and here is a brochure.
“Member Appreciation Package”: Three Conference Bonus for those Attending by Video Webcast – Early Bird Rate Thru June 30th
If you plan to attend by video webcast, take advantage of our special “Member Appreciation Package” to get access to all three of these Key Conferences for a single reduced rate for our members. And if you act by June 30th for this Member Appreciation Package, you will get $300 off as an Early Bird Discount.
And a Bonus for those Attending in San Francisco
Those who come to San Francisco to attend live in person are able to take advantage of a special reduced rate to attend the three-day NASPP 15th Annual Conference (with over 40 panels!) from October 10-12, which includes the “4th Annual Executive Compensation Conference” and the “Hot Topics and Practical Guidance Conference: The Corporate Counsel Speaks.” With over 2000 attendees year after year, many advisors find this to be the most practical conference available all year.
Act Now: You can register online by clicking any of the links above – or use this order form. If you wish to register for the “Member Appreciation Package,” you merely have to go to the online registration form for any of the three conferences or use this order form.
If you need help, please contact us at info@thecorporatecounsel.net or 925.685.5111 (8 am – 4 pm West Coast time).
Saturday’s WSJ included a cover story about how the FASB and IASB are considering radical changes to how financials are cobbled together as part of its joint Financial Statement Presentation project. The article’s title says it all: “Profit as We Know It Could Be Lost With New Accounting Statements.”
Here is an example of what financials might look like in the future. And here is an excerpt from the article:
“Pretty soon the bottom line may not be, well, the bottom line. In coming months, accounting-rule makers are planning to unveil a draft plan to rework financial statements, the bedrock data that millions of investors use every day when deciding whether to buy or sell stocks, bonds and other financial instruments. One possible result: the elimination of what today is known as net income or net profit, the bottom-line figure showing what is left after expenses have been met and taxes paid.
It is the item many investors look to as a key gauge of corporate performance and one measure used to determine executive compensation. In its place, investors might find a number of profit figures that correspond to different corporate activities such as business operations, financing and investing.
Another possible radical change in the works: assets and liabilities may no longer be separate categories on the balance sheet, or fall to the left and right side in the classic format taught in introductory accounting classes.
The overhaul could mark one of the most drastic changes to accounting and financial reporting since the start of the Industrial Revolution in the 19th century, when companies began publishing financial information as they sought outside capital. The move is being undertaken by accounting-rule makers in the U.S. and internationally, and ultimately could affect companies and investors around the world.
The project is aimed at providing investors with more telling information and has come about as rule makers work to one day come up with a common, global set of accounting standards. If adopted, the changes will likely force every accounting textbook to be rewritten and anyone who uses accounting – from clerks to chief executives – to relearn how to compile and analyze information that shows what is happening in a business.”
SEC’s Filing Fees: Demystifying How They Are Set
Have you ever wondered how the SEC’s filing fees are set every year? I have – and finally did a little research. I always knew that the SEC has no discretion over how much it collects in registration fees – but beyond that, it has been a black box for me. And I erroneously mused in this blog last week that the higher rates for 2008 might have something to do with funding the war.
The reality is that the fees are determined by a law passed by Congress a few years ago, the “Investor and Capital Markets Fee Relief Act of 2002.” Under that law, the SEC must adjust the fee rate each year to a rate that is reasonably likely to produce a target fee collection amount set in the statute. The SEC must determine the new fee rate by dividing the target fee collection amount by an estimate of the aggregate offering prices for securities registrations during the year.
Significantly, the target collection amounts set in the statute vary by year; thus, witness the sharp swing in rates the past few years. The targets in the law fell substantially between 2006 and 2007 (from $689 million to $214 million), but then they rose modestly for 2008 (to $234 million) and will continue to do so in the near future.
The new fee rate reflects the fact that the target for 2008 is $20 million higher than the target for 2007. But, even at this increased level, total fee collections in 2008 will still be dramatically reduced compared to just two years ago, when they were nearly three times larger…
Proposed Amendments to the Delaware General Corporation Law
On Harvard Law School’s “Corporate Governance Blog,” Professor Lawrence Hamermesh of Widener University School of Law made the following entry last week:
This year’s round of proposed amendments to the Delaware General Corporation Law, introduced on May 8, unquestionably falls a little short in the excitement department, at least compared to last year’s amendments (particularly those relating to director elections and retirement policies).
In the current crop, the most notable changes are to the appraisal statute. Under these proposed amendments:
– Petitions for appraisal can be filed by beneficial owners, rather than only by stockholders of record (although demands for appraisal must still be made by record owners). The Depository Trust Company will surely be relieved not to have to serve as a nominal petitioner in every public company appraisal suit.
– Reference to a “national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc.” has been deleted from the so-called “market out,” in light of last year’s reorganization of the NASDAQ stock markets.
– Most notably, there is to be a presumptive approach to awarding interest in appraisal proceedings. Ordinarily, interest is to “be compounded quarterly and shall accrue at 5% over the Federal Reserve discount rate (including any surcharge) as established from time to time during the period between the effective date of the merger and the date of payment of the judgment.” This has been Delaware’s default legal rate of interest for some time, and has frequently been the basis for awards of interest in recent appraisal cases. By making it the presumptive approach to awards of interest in such cases, however, it is hoped that unproductive litigation efforts on the interest issue can be avoided. Under the proposal, however, the Court of Chancery still retains discretion, for “good cause,” to choose a different approach in awarding interest.
These amendments to the appraisal statute are to apply only with respect to transactions consummated pursuant to agreements entered into after August 1, 2007.
Two other proposed amendments would clarify voting rights in two specialized situations, as described in the synopsis accompanying the legislation:
– An amendment to Section 141(d) clarifies that when a provision of the certificate of incorporation endows some directors with greater or lesser voting power than other directors, that differentiation of voting power applies both in voting by the board of directors and in voting by committees and subcommittees of the board, unless otherwise provided in the certificate of incorporation or bylaws.
– An amendment to Section 216(4) clarifies that, unless otherwise provided in the certificate of incorporation or the bylaws, a plurality vote (and not a majority of the quorum) is the vote required to elect directors where one or more classes or series of stock votes as a separate class or series on the election of directors. Last year’s amendments relating to the ability to provide in the bylaws for majority voting in the election of directors remain unaffected.
I have to chuckle. The following scenario reminds me of my youth in Chicago, when Cubs fans wore one of two buttons: “Leo Must Go!” or “Leo Must Stay!” Leo Durocher was the embattled manager at the time; I still have one of each button somewhere in a box. Leo coined the phrase, “nice guys finish last.”
1. Pro-Investor? This article states that the White House thinks that SEC Chairman Cox sides with investors too much. Here is an excerpt:
“Of course, even if such a resolution were to finally force Bush to dump Gonzales, it could not require him to choose a successor worthy of the job. But the president is so weak politically, and the supply of plausible nominees with “loyal Bushie” credentials is so small, that he might be forced to choose a person of stature, such as Securities and Exchange Commission Chairman Christopher Cox. After all, Bush did replace the hapless Harriet Miers as White House counsel with Washington wise man Fred Fielding, and the discredited Donald Rumsfeld as Defense secretary with Robert Gates. Other signs are not encouraging, however. In response to suggestions that Cox would be a good nominee, for example, an unidentified White House source told The Washington Times: “Cox has been a disappointment at the SEC.” The reason? “He’s shown too much of a willingness to work with the Democratic members of the Commission.”
Of course, we cannot presume that the Democrats are always in favor of investors though, which clearly may not always be the case.
2. Pro-Business? A Bloomberg article from yesterday notes that Rep. Barney Frank, the House Financial Services Committee Chair, will hold a hearing next month to hear from each of the five SEC Commissioners, in response to criticism that SEC policies are increasingly favoring companies over investors. Here is an excerpt:
“‘There have been concerns that various people have voiced,” Frank, 67, said in an interview yesterday. “There is no point in prejudging, but obviously there are enough questions in the air that we are holding a hearing.’ He cited complaints that recent SEC actions have muzzled the agency’s enforcement division and may make it harder for investors to sue companies.”
Your Friday “Make a Million” business idea? Make some buttons…
As noted in this article, Blockbuster has become the first company to receive the support from a majority of shareholders on a “say on pay” proposal. Most of these other proposals have received significant support from shareholders, as recorded in ISS’ “Say on Pay” Information Center (scroll down on that page).
There have been a number of recent Foreign Corrupt Practices Act settlements entered into by the Department of Justice and the SEC that are quite meaningful, as they illustrate the government’s continued focus on enforcement of the FCPA, including when there is a change in ownership. The most recent settlement involved Baker Hughes, which paid a record $11 million criminal fine.
Last Friday, Corp Fin Director John White gave this speech at Northwestern’s “27th Annual Ray Garrett Jr. Corporate & Securities Law Institute” about the compensation disclosures made during this proxy season. In his speech, John White noted that the Staff’s compensation disclosures review project has begun and would be done in the Fall. I believe the Staff intends to finish its review and then announce its final results, rather than commenting on what it finds in a piecemeal fashion.
Executive Compensation Disclosures: Parsing John White’s Speech
There is quite a bit of information in Corp Fin Director John White’s speech. It’s a “must read” speech if you deal with proxy disclosures at all. Here are some highlights:
1. CD&A and Analysis – First and foremost, John spoke about “Analysis (or lack thereof),” a topic we started writing about in The Corporate Counsel even before disclosures were filed. This will continue to be an area of focus during our October 9th event: “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference.” The agenda for that Conference will be available next week (and includes John, among other Staffers).
2. Performance Targets and CT Treatment – John also discussed several specific areas that the Staff is focusing on. One area involves performance targets, such as whether companies have properly omitted specific target information (ie. whether they meet the competitive harm standard) as well as looking at the adequacy of the disclosures required if performance target metrics are omitted, i.e. how difficult it will be for the officer – or how likely it will be for the company – to achieve an undisclosed performance level or other factors. John also discussed the problem of negative numbers, disclosure about the CEO’s role in setting compensation and perk disclosure.
3. Disclosure Length – John also weighed in about the length of the compensation disclosures, something I have blogged about several times in the wake of a recent Chairman Cox speech that flagged this issue. Taking the risk that excerpts don’t place the statements in proper context, here are some excerpts from John’s speech on this topic:
– “I also think that criticisms of the length and language of the new disclosures can go too far. One of the primary drivers of length of the disclosure in proxy statements is that executive compensation itself tends to be very complicated and varies significantly in form and function, in spirit and letter, from company to company. Even if plain English principles are faithfully applied, under the new rules there may very well be substantially more disclosure required overall.”
– “Criticisms of the length and language of executive compensation disclosures tend to be fairly amorphous complaints. It is also not necessarily clear—if you agree with those criticisms on their merits—whether the problems or weaknesses leading to those complaints are rooted in the rules themselves, or in companies’ failure to comply with the rules. I would urge people to keep in mind, though, that the Commission was seeking to establish a “layered” disclosure approach, with CD&A as the top layer.”
SEC’s Chief Accountant: No Meddling With FASB
Jack Ciesielski notes in his “AAO Weblog“: According to this article on CFO.com, Chief Accountant Conrad Hewitt appeared to deny that the budget actions were linked to any further SEC gains in control over FASB, saying “The budget coincidentally came at the same time as we were [evaluating] candidates,” adding that the SEC’s role over FASB is outlined in a 2003 agreement between the two organizations.” He also said that “FASB is independent as far as we are concerned.We do not appoint board members.” The remarks took place at a financial reporting conference at Baruch College in New York.
The next big scheduled test of how involved the SEC will be in FASB member selection will come up in less than a year. Next July 1, current board member Mike Crooch will trudge into the sunset, and the machinery behind his replacement will click into action around the beginning of 2008. In addition to the usual guessing games about who will be chosen, there’ll be an added element of suspense surrounding the SEC’s involvement – or laissez-faire.”
Conrad’s remarks come after FASB Chairman Bob Herz admitted to concerns about “control” issues with the SEC – as noted in this CFO.com article, Bob pledges to guard FASB’s independence.
