A few weeks back, the WSJ ran this article about the SEC Staff’s push for more companies to disclose their restatements under Item 4.02 of Form 8-K. Apparently, a lot of companies are restating without filing a Item 4.02 8-K – rather these companies are including the new financials in their next 10-Q or 10-K, despite the fact that FAQ 1 of the SEC’s 8-K FAQs says you can’t do that.
The Staff is busy issuing comment letters to companies who have not filed the Item 4.02 8-K, because investors rely on seeing a 8-K to signal that a restatement has taken place. The comments often ask the reasons why a Form 8-K wasn’t filed – rather than demand that one be made – because Item 4.02 isn’t triggered for every restatement, just “material” ones. So companies get an opportunity to argue why a 8-K wasn’t necessary.
Of course, companies aren’t going to always win this argument. Apparently, Inter-Tel (a company quoted in the WSJ article) apparently didn’t file the 8-K because they determined that the changes made in the restatement were immaterial to any prior quarter or reporting period, but the Staff reportedly asked that they go back and highlight the restatement in a specific filing.
How Does SAB 108 Work Here?
Juxtapose these stealth restatement situations to newly-issued SAB 108 which states, as noted in this press release: “The Staff will not object if a registrant records a one-time cumulative effect adjustment to correct errors existing in prior years that previously had been considered immaterial – quantitatively and qualitatively – based on appropriate use of the registrant’s previous approach.” SAB 108 describes the circumstances where this would be appropriate as well as the required disclosures that must be made.
I guess the bottom line here is to go ahead and clean up the balance sheet to correct those immaterial errors – but if you determine that you need to restate, don’t skip the 4.02 8-K filing.
New FAS 158 on Pension Plan Accounting
On Friday, the FASB issued FAS 158 on “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” Here is a summary of FAS 158. This is quite a complex statement that covers retiree health care benefits in addition to pension plans. The impact on companies will vary – and could be quite significant for some. The resulting balance sheet changes could have effects on contractual provisions (e.g. loan agreements) and measurements for other purposes, such as net worth or shareholder’s equity.
FAS 158 requires employers to recognize the overfunded or underfunded status of a defined benefit post-retirement plan (other than a multi-employer plan) in the statement of financial position, measured as the difference between plan assets at fair value (with limited exceptions) and the benefit obligation. It also would recognize – as a component of other comprehensive income, net of tax – the gains or losses and prior service costs or credits that arise during the period, but pursuant to FAS 87 and 106 are not recognized as components of net periodic benefit cost. There also are disclosure requirements.
The recognition and disclosure requirements are effective for fiscal years ending after December 15, 2006 – so it will apply this year for calendar year companies. There are separate effective date and transition provisions for a new measurement date requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position.
FAS 158 is phase one of the FASB’s project on pension and other post-retirement benefit plans. Phase two will address other issues, including income statement treatment of pension plan adjustments.
As overvoting has been my pet peeve for quite some time, I’m pretty excited about tomorrow’s webcast – “Understanding Overvoting and Other Tricky Voting Issues” – where a group of experts will educate us about what overvoting is all about and why you should care.
Education is important because there is so much misinformation out there on the topic and it’s pretty hard to pin down exactly what is going on “behind the scenes” when it comes to director elections. For example, did anyone find it peculiar how it was reported that it would take one month for tabulators to finalize the results of the recent contested election at Heinz? One month!
As evident from this press release, the NYSE is paying more attention to overvoting issues these days as it recently fined UBS, Goldman Sachs and Credit Suisse for permitting overvotes to occur. Here is an excerpt from the NYSE’s press release:
“There are no standard industry procedures that govern a Tabulator’s approach to dealing with over-voting. Depending upon the procedure implemented by the Tabulator, certain customers’ voting instructions may not be represented as originally given. Enforcement’s investigations have not uncovered any instance in which an over-vote improperly affected the outcome of a proxy vote or any instance in which a shareholder who attempted to vote was disenfranchised.
However, by submitting an over-vote, a member firm subjects its customers to the risk that the Tabulator would not accept their votes. Through an under-vote, a member firm subjects its customers to disenfranchisement by the broker-dealer’s own actions.”
In my view, it’s only a matter of time before an overvote will “improperly affect the outcome of a proxy vote” as majority vote standards become more common and investors increasingly challenge boards and management. At a minimum, the time clearly has arrived for standard industry procedures! Floyd Norris of the NY Times recently focused on overvoting and related issues in this column, “Time to Bring Share Lending Into the Light.” And we have posted some overvoting articles in our “Annual Stockholders’ Meetings” Practice Area.
The Impact of Short Selling Tactics
Among the topics to be discussed on tomorrow’s webcast is how lending shares and short selling plays into the quagmire of vote outcomes. Naked short selling has caught the attention of the SEC, as the agency recently proposed to amend Regulation SHO (see our new “Short Sales” Practice Area). And there are groups whose sole purpose is to tackle this issue, such as the National Coalition Against Naked Shorting.
Companies with smallish floats likely are the most vulnerable to short selling tactics in elections. One of our webcast panelists, Carl Hagberg, supports that view and disagrees with those that assume that small floats would lead automatically to higher borrowing costs. Carl believes that those that don’t think illiquid companies are vulnerable fail to account for the facts that (a) you only need to borrow stock for one day (ie. the record date) to get the votes; (b) a lot of “lenders” never even have stock to “lend” – and no one can ever tell since the “loan” is effected by a mere “bookkeeping entry”; and (c) there no penalties if the stock never really moves (who’s checking? no one!) – or if bookeeping “errors” are simply reversed later! Carl’s latest issue of his Shareholder Service Optimizer shows how there is fairly compelling evidence that the Hewlett-Packard/Compaq merger would not have been deemed to have been approved by shareholders “but for” overvoting making the difference.
There clearly are a lot of thorny issues involved – although why some of these issues are thorny is beyond me. For example, if the brokers can keep track of who gets a dividend, why can’t they keep track of who has voted? And why is the disclosure about the ramifications of having one’s shares lent so unclear in most brokerage agreements (what a place for plain English!)? We shall learn more about these tricky issues during tomorrow’s webcast.
October Eminders is Up!
The latest issue of our monthly email newsletter is now posted.
Responding to numerous member requests who are grappling with “what is a perk?,” I am in the process of compiling items/thresholds to include in an online survey to help gauge what consensus there might be among practitioners in this area. Please email me any items/thresholds that you want folks to vote upon – your identity will remain anonymous.
At Last! An Opportunity to Comment on ISS’ Proxy Policies
Last week, ISS commenced its first-ever public comment period, allowing anyone to provide input into its 2007 proxy policies. In the past, input was privately solicited from a small diversified group of market players. In my mind, this comment opportunity is at least as important as the SEC’s rule-making process. With director elections no longer routine, ISS’ proxy policies are more important than ever.
The comment period ends next week on October 11th. ISS has made it very easy to submit comments – you can submit your thoughts using their online form; no need to write a separate letter. There are online forms for these six topics:
And ISS wants to hear from everybody, individuals as well as groups. Take advantage of this opportunity or else they might conclude that we don’t want it and not offer it next year! ISS intends to announce its 2007 policies in mid-November.
Investors: Mad about Backdating and Ain’t Gonna Take It Anymore
Speaking of ISS, I taped the bonus panel for the “3rd Annual Executive Compensation Conference” with Pat McGurn and Martha Carter of ISS last week and some of the information was staggering. I knew backdating was a big deal – but getta load of this:
“In ISS’ 2006 Policy Survey, 85% of the respondents indicated that backdating of stock options is very problematic, on a scale of “not at all problematic” to “very problematic.” In situations where a company admits to backdating, 78% of the respondents supported recoupment of the windfall associated with the backdating as a remedy at the company. (Other actions included resignation of any executive involved, including the CEO, and the resignation of the company’s chair of the compensation committee.)” Clawback provisions clearly are “in.”
Next Thursday, hear this ISS bonus panel as well as catch the panel about “how to do clawbacks?” On October 12th, join the 2000 that will participate in Las Vegas – or the more than 3000 that will watch by nationwide video webcast – for the “3rd Annual Executive Compensation Conference.” To be able to understand the practices that you will be describing in the CD&A, etc., you need to attend this major one-day conference that has become a “must” for all directors and all those involved with executive compensation. Note that registration rates are more than half-off for CompensationStandards.com members.
By looking at our agenda for this Conference, you can see that this year’s conference will be even more crucial than before to watch live or by archive. Register today.
Keeping Abreast with Mark Borges: More Analysis and SEC Guidance
I just posted an October Supplement on CompensationStandards.com that compiles the latest blogs from Mark Borges. Mark continues to amaze with his daily insights into the new executive compensation rules, including some recent notes he took on an ABA teleconference in which he participated with Corp Fin’s Associate Director Paula Dubberly.
With more attention being paid to director compensation – and in light of the SEC’s revised requirements for disclosure of director compensation – boards should be re-examining all director perks that previously seemed harmless and determine whether their disclosure is worth the perk. As part of this re-evaluation, companies should ensure their disclosure controls & procedures capture all gifts provided to directors.
As I mentioned at our Conference a few weeks ago, companies should consider adopting a policy regarding gift-giving to directors to assist those responsible for collecting perk data and drafting the proxy disclosures perform their job. Of course, this policy can be fairly simple if the company’s policy is that directors are not permitted to receive any gifts over a de minimus value – as some governance experts believe that there aren’t any sound reasons for directors to receive gifts from people outside the company or even within the company (unless they receive something of insignificant value, such as a token gift at a dinner).
And companies are acting to rein in perks: Mark Borges recently noted in his blog that Molex’s proxy statement disclosed that the compensation committee had recently adopted a perquisite pre-approval policy. Under this policy, certain (unspecified) perquisites and maximum amounts for such perquisites have been pre-approved by the compensation committee. And, the committee must separately approve any perks not specifically included in the policy or amounts that exceed the maximum amounts in the policy.
– Who should have the authority to give gifts to directors (from either outside or inside the company)?
– What should be addressed in a director gift policy?
– How should gift giving to directors be tracked?
The Latest on Internal Controls Testing
In this podcast, Ben Termini of BDO Seidman’s Risk Advisory Services Group describes the latest trends in internal controls testing, including:
– How can businesses reduce the number of controls tested on a daily basis (by as much as 60 percent without impacting effectiveness)?
– What daily controls are considered “key” controls?
– How does the more focused scope of daily control testing affect monthly, quarterly and annual testing?
– What are entity level controls? And why are they so critical to an effective internal audit program?
– What are general computer controls – and why are they imperative to ensuring efficient automated controls?
– How does the size of a company impact controls? Does “one size fit all”?
Motion to Win!
A little Friday fun, I am told that this is a real pleading that was filed! Reminds me of some of the handwritten notes I would see from disgruntled investors when I worked at the SEC …
In response to heavy demand, we have posted three sample equity grant policies in the “Timing of Stock Option Grants” Practice Area on CompensationStandards.com. These are in Word – and one of the samples relates solely to new hires.
John White on Director’s Role in the SEC Comment Letter Process
In this speech entitled “An Expansive View of Teamwork: Directors, Management and the SEC,” SEC Corp Fin Director John White appeals to directors to take a more active role in the SEC comment letter process by at least receiving copies of the SEC comment letters and responses from the company – and not allow management to “shield” directors from those documents.
As part of his series of speeches on the topic, John also spoke about the SEC’s new executive compensation rules – for example, see this excerpt about the director’s role in preparing the CD&A:
“I mentioned very briefly that your CEO and CFO will now be called upon to certify your company’s Compensation Discussion and Analysis. As I also said earlier, that section of your company’s disclosure must address the policies and decisions related to executive compensation. One objection that we heard to having that section be company disclosure is that it unfairly makes the CEO and CFO responsible for board and compensation committee actions that are outside the officers’ “jurisdiction”, for lack of a better word.
Your compensation committee report, as well as any consultations and discussions you may have about your CD&A section, can help provide your officers with the necessary insights and understanding they need in making their certifications. And this, in fact, is a two-way street. Your own comfort and your own knowledge can be equally fortified and improved through this process. And if you become more involved and more adept with these issues, that will inure to the benefit of your shareholders and investors more generally, which of course comes full circle to your overlap with the SEC.
The Commission has carefully structured a disclosure system in this area designed to further the interests and address the needs of investors. I hope you can see it in many ways as also offering the potential of furthering your interests and addressing your needs as directors. One important footnote — I would encourage you again to take a look at my remarks on principles based disclosure. They highlight and explain this crucial concept and, I believe, may help you and your company in drafting and evaluating your CD&A sections in the future.”
Late SEC Filings as Bond Defaults: New York State Court Weighs In
A few weeks ago, I blogged about how some investors are leveraging late SEC filings as a way to accelerate repayment of outstanding bonds. Here is news of a recent development in this area from Davis Polk (and this memo is posted in our “Late SEC Filings” Practice Area):
The Supreme Court of New York, New York County (New York State’s trial level court) on September 18, 2006, issued an opinion in The Bank of New York v. BearingPoint, Inc., a litigation where a central issue was whether a company’s failure to file Exchange Act reports when required by the SEC constituted an Event of Default under a convertible bond indenture.
In the BearingPoint litigation, the company failed to file, within the time period required by the SEC, its annual and quarterly reports on Form 10-K and 10-Q for a variety of publicly announced reasons, including the existence of material weaknesses in the company’s internal controls and financial accounting. Following the company’s failure to file those reports within the SEC-prescribed time period, certain holders of its 2.75% Series B Convertible Subordinated Debentures sought to declare an Event of Default under the covenant default provisions as set forth in Section 7.01(g) of the indenture. The particular covenant under which holders alleged a default was Section 5.02 (entitled “SEC and Other Reports”) which provides:
“[T]he Company shall file with the Trustee, within 15 days after it files such annual and quarterly reports, information, documents and other reports with the SEC, copies of its annual report and of the information, documents and other reports (or copies of such portions of any of the foregoing the SEC may by rules and regulations prescribe) which the Company is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. The Company shall comply with the other provisions of TIA Section 314(a). [Emphasis Added.]”
Although the Indenture clearly states that the company had no obligation to file SEC required reports until those reports were actually filed with the SEC, the court nonetheless ruled that the company’s failure to file those reports when required by the SEC constituted an Event of Default under the indenture.
Section 314(a) of the Trust Indenture Act does not specify a time period during which a company must file SEC required reports, but merely states that an issuer must file SEC reports with the indenture trustee. The court reasoned that a reading of the indenture that required the company to file those reports whenever it actually filed them with the SEC would frustrate the purpose of Section 314(a) the TIA which, according to the court, “was to make BearingPoint’s financial information available to Series B Debenture Holders … [so that] investors can make informed decisions about their investment and guard against the risks attendant to incomplete information.”
The BearingPoint decision is the New York trial court’s opinion upon summary judgment. As a result, it is not certain whether other courts would reach a different conclusion or whether, upon appeal, the New York Court of Appeals would affirm the trial court’s decision. In addition, because Section 314 of the TIA does not directly incorporate the filing requirements described above into every TIA qualified indenture and only obligates an issuer to make those filings as a matter of statute, the court did not address whether a failure to comply with Section 314 would have any effect on an indenture that did not expressly incorporate that section. Moreover, where the indenture does incorporate Section 314 of the TIA, as did the BearingPoint indenture, the court did not address contractual remedies other than acceleration that could have been included in the Indenture, such as a mandatory increase in interest rates.
A guest blog from Jesse Brill: Since time is of the essence – and we all face a formidable challenge – when we sit down to draft and review the new CD&A for the upcoming proxy season, we can understand the appeal of getting your hands on a mock-up CD&A. We have reviewed a few mock-ups that law firms have drafted and – at least, so far – they tend to provide the kind of pap that the SEC is trying to get away from.
The mock-ups punt on analysis and give the impression that the sample is a good starting-off point. We disagree – and we have decided not to post any samples yet because we believe we would be doing a disservice to those of you trying to comply with the SEC’s (and shareholder’s) expectations.
We urge law firms drafting samples to underscore the critical analysis that is expected. Otherwise, clients will fall into the trap of merely disclosing all the generalities and boilerplate that the SEC and shareholders do not want to see. If we find a good sample, we will immediately post it and make everyone aware that it’s reliable as a sound example. Of course, every company’s circumstances are different and each CD&A should be unique.
Remember that there is guidance out there available for you as you sink your teeth into a CD&A. We encourage you to read our complimentary Special Supplement to the September-October 2006 issue of The Corporate Counsel before you begin to consider your CD&A. For directors, you should check out this complimentary issue of Compensation Standards, which has a lead article on the board’s role in the CD&A process.
What You Need to Do Now: On October 12th, join the 2000 that will participate in Las Vegas – or the more than 3000 that will watch by nationwide video webcast for the “3rd Annual Executive Compensation Conference.” To be able to understand the practices that you will be describing in the CD&A, you need to attend this major one-day conference that has become a “must” for all directors and all those involved with executive compensation. Note that registration rates are more than half-off for CompensationStandards.com members.
By looking at our agenda for this Conference, you can see that this year’s conference will be even more crucial than before to watch live or by archive. Register today.
Webcast Attendees: Time to Test Your Connection
As always, for those attending the “3rd Annual Executive Compensation Conference” by video webcast, we strongly advise that you ensure you have the proper connection and equipment before the Conference. You should act now to test your ability to access video as you will not be able to test after Thursday, September 29th.
It’s That Time of the Year Again – End of the SEC’s Fiscal Year
When fiscal year 2007 starts on October 1st, the SEC will likely be operating under a continuing resolution as it normally does (under which fees remain at their current rates) – see last year’s blog as to why this is an annual rite. Once Congress approves the SEC’s ’07 budget, registration fees will go down to $30.70 per million from $107.00 per million. See the SEC’s latest fee rate advisory.
As reported by Forbes.com, it appears the NYSE is postponing amending Rule 452 to eliminate broker non-voting in order to allow companies additional time to prepare for implementation. According to the article, the rule won’t be changed any earlier than mid-2007 -and probably wouldn’t go into effect before 2008.
Not too surprising given that we haven’t heard much on this since the NYSE’s Proxy Working Group issued recommendations in June – and the postponement is definitely a good idea given the wide scope and magnitude of change taking place right now with respect to director elections (egs. new SEC proxy rules; ASFCME case; majority vote movement, etc.).
Senate Passes Bill for SEC to Regulate Credit Rating Agencies
On Friday, the US Senate passed a bill in a voice vote – “The Credit Rating Agency Reform Act of 2006” – which would give explicit authority to the SEC to regulate credit rating agencies, including resolving conflicts of interest and challenging practices that may be abusive or anticompetitive. The bill establishes standards, including a three-year track record, for agencies seeking to be designated as “nationally recognized” rating firms and allows the SEC to deny designating agencies that can’t consistently do a high-quality job of evaluating debt. This Senate bill now has to be reconciled with a House-passed bill (which would give the SEC oversight over credit rating agencies but doesn’t have all of the requirements called for by the Senate bill). Learn more in this WSJ article from Saturday.
These bills stem from a SEC concept release issued three years ago, which itself emanated from Section 702 of Sarbanes-Oxley (which required the SEC to submit a report to Congress on the role of credit rating agencies).
XBRL Modernization of SEC’s EDGAR to Begin
Yesterday, the SEC announced the winner of its $48 million EDGAR contract competition (ie. Keane Federal Systems, with other partners such as Microsoft, Bearingpoint, Rivet Software, EMC and Akamai) in this press release. The SEC also announced the winner of a much smaller contract to build an XBRL viewer/analytical tool for the SEC’s website.
More interesting is that the SEC is spending $5.5 to XBRL US (which I believe is also working with the FASB on a similar project) to improve and extend XBRL taxonomies. This development is what you should watch out for the most, as taxonomies are critical because that’s how investors will be reading your financials. The SEC also announced an upcoming roundtable that will focus on new XBRL software, which will include demonstrations of the latest XBRL software.
By the way, I hear that some people are confused and think that the SEC already has mandated XBRL; that’s not accurate. This is merely a baby step to get EDGAR ready in case the SEC someday mandates XBRL…
As for any content on our sites, we have a disclaimer – but even more so for these sample documents, as they should not be presumed to be legally sound as you should make that analysis yourself. If you peruse a sample document and upgrade it, please let me know – or if you have a sample document that you wish to contribute (anonymously or otherwise), you will receive total consciousness on your deathbed…
Corp Fin’s Executive Compensation FAQs: Early Compliance and IPOs
On Friday, the SEC’s Division of Corporation Finance issued a small set of FAQs on its new executive compensation and related-party transaction rules, confirming what I blogged last week about the interplay between the effective date of the new rules and early compliance. The FAQs also address the application of the rules and transition provisions to IPOs.
Cablevision’s “I Pay Dead People” Grants
Ah, another contender for governance posterchild of the year! Some pretty heated competition this year. In Friday’s WSJ, this article revealed that Cablevision Systems awarded options to a vice chair after his 1999 death but backdated them, making it appear the grant was awarded when he still was alive. Critics of executive pay often call it “pay for pulse” – but this doesn’t even meet that low standard!
Perhaps even more troublesome is that the company improperly granted options to a compensation consultant options accounted for them as if he were an employee. So far, the compensation consultant hasn’t been identified (apparently, the award was cancelled in 2003) – but this raises all sorts of red flags as “the company also said the consultant ‘directly participated in the options dating process.'” Lesson learned: Board cannot solely rely on compensation consultants to do the right thing.
I don’t know how you felt, but I had the sinking suspicion that the Hewlett-Packard story would continue to dominate the headlines as more sordid details emerge. Another lesson in how not to manage a crisis. It’s so critical for a company to maintain its credibility during a crisis so that shareholders and other stakeholders can believe management when they say they have a handle on it. Come clean quick and take the actions necessary to show that you have the situation under control. Should be quite an interesting House hearing next Thursday!
For a description of the latest developments, here is a:
– WSJ article intimating that H-P CEO Mark Hurd knew more about the investigation than has been previously disclosed
– Washington Post article providing a graphic description of a February report that details the investigation activity, which targeted wives and other relatives of H-P directors and reporters and even included obtaining Larry Sonsini’s phone records. Apparently, the code names for the H-P investigations were “Kona 1” and “Kona 2”; Chair Patricia Dunn has a house in Kona, Hawaii.
– NY Times article saying that H-P conducted feasibility studies on planting spies in news bureaus of two major publications – and that H-P officers supervising the investigation (the company’s chief ethics officer) knew of the use of phone ruses at least as early as January 2006 and raised questions about their legality.
The Art of Boardroom Etiquette and Confidentiality
Many members are talking about legal issues implicated when a board is faced with a leak. There are a myriad of corporate, securities, and privacy law issues as well as listing standard and contract considerations (e.g. codes of conduct). I am putting together a webcast on these issues that will be announced shortly.
Here are a few musing on this topic that I have received from members:
– The fiduciary duty includes a duty to maintain confidentiality. In addition to that, most corporate codes of conduct include confidentiality restrictions and are applicable to boards. Lastly, some companies make their directors sign confidentiality agreements to emphasize the seriousness of their confidentiality obligations.
– I can imagine scenarios where the director believes his duty of loyalty in fact requires him to disclose information to protect the best interests of the compnany/shareholders. It will be interesting to see how the various lawsuits play out in the HP matter as there have been suggestions that the disclosures made by the HP director did not violate his fiduciary duties and thus the mere initiation of the investigation was ill-advised (in addition to the methods used).
– When it comes to leaks, my research suggests that it would simply be a duty of care/loyalty breach of fiduciary analysis – but it becomes interesting when you think about the fact that Boards owe their obligations to shareholders and as a result, there could be instances where directors would feel the need to discuss information shared by the board in order to satisfy those obligations.
– Where we have seen confidentiality issues come up is in the context of contested director elections where the company tries to get the dissident to sign a confidentiality agreement as a condition to coming on the board. The fiduciary duty is one of doing what is in the best interests of stockholders, and if it is in the best interest for confidentiality not to be maintained, then…
– Under Delaware corporate law, there are two fundamental fiduciary duties for directors: the duty of care and the duty of loyalty. There is no duty of confidentiality per se under Delaware corporate statutory or case law. Nonetheless, the duty to keep company information confidential is generally considered part of the duty of loyalty, and disclosure of a company’s confidential information by a director could constitute a breach of the duty of loyalty. And, even though not an explicit part of Delaware corporate law, the importance of board confidentiality is generally recognized as a matter of good corporate governance, because of the potential implications that disclosing confidential information can have under insider trading laws and its potential impact on the company’s business generally.
Harvey Pitt’s Take on Boardroom Leaks
Check out this Forbe’s commentary from Harvey Pitt entitled “Looking For Leaks In All The Wrong Places.” Here is an excerpt:
“The failure of the HP board to address what the rest of the business community had long seen festering reflects a critical lack of pragmatic board leadership. Dysfunctional boards almost always erupt into internecine warfare if nothing is done to allow the causes of dissension and disagreement to be addressed and, hopefully, amicably resolved. Appropriate opportunities should be afforded for concerns to be raised. Time at meetings is one useful vehicle, but sometimes concerns need to be raised in one-on-one conversations, so directors don’t feel intimidated or embarrassed.
Boards can and must be collegial without being required to proceed unanimously. The goal is an atmosphere that permits and encourages frank debate and the exploration of different viewpoints. This doesn’t mean boards should be comprised of “yes” men and women. But thoughtful directors should agree that differences of view are a positive factor, as long as they can be resolved rationally and collectively. Anyone who fails to accept that as an operational credo should be disqualified from serving on boards altogether.
At HP, the leak problem should have been raised with all the directors, at a face-to-face discussion around the boardroom table. Directors should have been solicited for their views on how to achieve greater collegiality and stem future leaks. Leaks can’t be condoned. But most people who try to identify leakers discover it’s almost impossible unless unethical or illegal means are employed.
If there had been a general consensus on HP’s board that the leaker should be identified, the simplest approach would have been to ask all directors, again at a face-to-face meeting, to make their telephone and e-mail records available to a third party investigator. If one or two directors refused, but the others were prepared to permit their records to be reviewed, that would have been a fairly good indication of the identities of the responsible parties.”
Director Survey on Priority of Confidentiality
CorpGov.net describes this interesting survey, as written up by PlanSponsor.com: “The Ponemon Institute claims that 85% of 226 directors responding to a survey place a higher priority on corporate confidentiality than shielding their personal information from prying eyes. Just over half of the surveyed directors said they have served on corporate boards that have authorized the use of “aggressive” surveillance techniques to address a potential leak, according to a press release regarding the survey, taken just days after Hewlett-Packard confirmed details of a corporate investigation into apparent leaks from their board. Half the surveyed directors said they would endorse a ruse similar to the one used by HP’s detectives to obtain phone records, as long as the deceptive tactics aren’t deemed illegal.”
Reminder: Don’t Forget to Register for Huey Lewis & The News
For those attending the “14th Annual NASPP Conference” in two weeks, don’t forget that registration for the NASPP Conference doesn’t automatically register you for the Huey Lewis & The News bash at the Mandalay Bay on October 10th. For Conference attendees, there is no charge to attend the concert, but you must register for the concert separately by the end of next week, September 29th.
A lot of folks have been asking whether a September 30 fiscal year end company can voluntarily chose to comply with the new executive compensation/related-party disclosure rules for its upcoming proxy statement. The SEC Staff has been answering that question with: “Yes, so long as the proxy statement is filed on or after November 7th (which is the date the new rules become effective) – and as long as the proxy statement complies with all of the new rules (meaning Items 402, 404 and 407, etc.). Of course, this begs the question of who would want to be the first guinea pig anyways…
State of Corporate Law Reform
Between legal challenges to the authority of Sarbanes-Oxley and lobbying efforts to reform the Act, pressure has never been greater to make some changes. Earlier this week, SEC Chairman Cox testified that he agrees that some changes to Section 404 may be in order, but he doesn’t believe those changes should be legislated. PCAOB Chair Mark Olsen testified similarly. Here is all the opening statements and testimonies from this week’s House hearing. And here is a final report from the Financial Services Forum from a roundtable conducted on America’s competitiveness a few months ago.
In this podcast, Cindie Jamison and Kathy Schrock of Tatum LLC provide some insight into the latest developments in the long-standing efforts to reform Sarbanes-Oxley and how the reform is impacting the capital markets, including:
– Have non-US companies continued to list elsewhere? If so, why?
– What can be done to streamline the US registration and listing process to minimize obstacles and reduce negative perceptions?
– What’s next and where is it going? And how is it going to get there?
Nasdaq Amends Cure Period for Independent Director/Audit Committee Compliance
Last week, the SEC approved amendments to Nasdaq Rules 4350(c)(1) and 4350(d)(4)(B) that modify the cure period for companies that fail to comply with the majority independent board requirement, either because a vacancy arises on the board or because a director ceases to be independent for reasons outside their reasonable control – as well as for when there is a failure to comply with the audit committee composition requirement because a vacancy arises on the audit committee. The prior rules provided that the cure period lasted until the earlier of the next annual shareholders’ meeting or one year from the event that caused non-compliance, sometimes resulting in a company having only a short period to recruit a new director.
The amended rule provides more time for companies to recruit – so that a company will now always have at least 180 days from the non-compliance event to regain compliance. Note that the SEC’s release states that the amended rules don’t allow an audit committee member who ceases to be independent to remain on the committee beyond the period contemplated in SEC Rule 10A-3(a)(3) and Nasdaq Rule 4350(d)(4)(A)(i.e. earlier of the next annual shareholders meeting or one year from the non-compliance event).
