If you intend on participating, please download the three sets of talking points before the webcast starts.
The “3rd Annual Executive Compensation Conference”
On CompensationStandards.com, we have just posted the agenda for the “3rd Annual Executive Compensation Conference.” As the more than 3000 that took in each of the first two conferences can attest, more practical guidance is gleaned from this conference than any other. And with the SEC’s new proposals raising the profile of compensation practices to even higher heights, you will not want to miss this year’s Conference.
This year’s Conference will be held on Thursday, October 12th in Las Vegas – and by nationwide live video webcast. CLE credit in most states – and ISS credit for directors – is available. Register today!
Early Bird Discount: Act Now!
Act before May 31st and receive an additional 50% off the firmwide rate to the “3rd Annual Executive Compensation Conference.” This special rate of $995 will enable everyone in your company or firm to access the live video webcast of the Conference (as well as access the video archive of the Conference and all the course materials). This is a tremendous savings for both law firms and companies whose directors need to get up-to-speed. Applies to companies and firms that have a firmwide license to CompensationStandards.com.
According to ISS’ “Corporate Governance Blog,” Sprint Nextel shareholders supported an AFL-CIO shareholder proposal on majority voting at its annual meeting last week with 66.4% of the votes cast. That follows a 61.7% showing at Novell on April 6th for a United Brotherhood of Carpenters and Joiners proposal. These early votes suggest that majority voting will receive significant investor support this season at companies that have not adopted board election reforms, such as director resignation policies and majority vote standards.
However, majority vote proposals continue to receive less support at companies that have adopted resignation policies (which companies retained plurality voting). Last week, similar proposals received 37.5% at Wachovia and failed to reach a majority at Burlington Northern Santa Fe. Electronic Data Systems reported that a majority elections resolution got 32% support, but that tally counted abstentions as votes against. In February, all three companies director resignation policies.
These votes are consistent with earlier results, where majority vote proposals failed to pass at Morgan Stanley, Hewlett-Packard, Ciena and Analog Devices, all of which had adopted resignation policies. More to come: majority vote proposals will appear on the ballot at 24 companies this week alone!
Final Report from the SEC’s Small Business Advisory Committee
Yesterday, the SEC’s Small Business Advisory Committee submitted its 241-page final report to the SEC. The FEI’s “Section 404 Blog” has a summary of its contents. Here is a statement from Chairman Cox on the report.
What Now After Dabit
There’s been lots of commentary after the recent US Supreme Court’s case on SLUSA, Merrill Lynch v. Dabit (including all these law firm memos). In this podcast, John Stigi of Sheppard Mullin Richter & Hampton provides some insight into the decision – and one more coming up – and analyzes the lay of the land in its aftermath, including:
– What did the US Supreme Court decide in Dabit? Why is the decision important?
– What other US Supreme Court case will be decided soon that might further impact securities class actions?
– What do you think the plaintiffs’ bar plan of action might be now?
Study: AIM Market Could Be the New Nasdaq
According to this Reuters article, a recent study suggests that the London Stock Exchange’s AIM market is the new Nasdaq, one reason why the Nasdaq has bought a 15% stake in the LSE. Learn more about what AIM is all about – and how (and why) a company might list on AIM – on our May 11th webcast: “How to Go Public on the London Stock Exchange’s AIM.”
Listening to Meredith Cross of Wilmer Hale at a local seminar last week, I was reminded that, under the new ’33 Act reform, companies are now grappling with how to handle the risk factor discussion in their upcoming Form 10-Qs.
For those of you that just filed Form 10-Ks recently, you will recall that the reform amended Form 10-K to require companies to describe – under the caption “Risk Factors” and only “where appropriate” – the risk factors described in S-K Item 503(c) that are applicable to the company. As the adopting release clarified, “a risk factor discussion in a Form 10-K may not be necessary or appropriate in all cases, depending on the issuer.”
Now, companies must consider another new disclosure requirement – to “set forth any material changes from risk factors as previously disclosed in the registrant’s Form 10-K.” A challenge is presented because the SEC stated in the adopting release that “we discourage, unnecessary restatement or repetition of risk factors in quarterly reports.” Thus, the SEC doesn’t appear to want a “cut and paste” of the 10-K risk factor section in the 10-Q, but rather an update of any risk factors described in the 10-K.
It remains to be seen how closely the SEC Staff will enforce this “discouragement,” as some companies may wish to follow their established routine of including all risk factors in each Form 10-Q, either for forward-looking safe harbor purposes or for the benefit of investors who may not know that they otherwise would need to search back through earlier filings to determine what other risks exist for that particular company.
To help you sort through this predicament, in our “Form 10-Q” and “Securities Act Reform” Practice Areas, we have posted a list of companies that already have been faced with complying with the new 10-Q requirement.
Are These Hedge Fund Results Real?
Wondering where the next large scale fraud is going to come from? I think Floyd Norris might have hit the nail on the head in his column in Friday’s NY Times. Maybe I’m getting paranoid in my old age, but there always is a “next” big wave of fraud and it seems like it usually emanates from the latest “too good to be true” investment vehicle.
Handling Whistleblowers
In this podcast, Phil Johnston, Special Counsel of Nexsen Pruet, a former CEO of two public companies and a co-author of the Corporate Governance Leadership Blog, provides some insight into what works in implementing a whistleblower compliance program, including:
– In the overall scheme of compliance, how important is Section 301(4) of Sarbanes-Oxley?
– Not-for-profits are also implicated by Sarbanes-Oxley as Section 301(4) makes it a crime to retaliate against a whistleblower. How have not-for-profits reacted to this new law?
– Based on your own experiences from serving on a director on five different public company boards, what do you see as the biggest mistakes that companies typically make in implementing their whistleblower compliance programs?
– I understand you have done research in the whistleblower cottage industry, including visiting a number of service providers. What should boards consider in selecting a service provider?
Yesterday, the SEC’s Small Business Advisory Committee held its final meeting. The Committee has until April 23rd to formally submit its final report with any finishing touches to the 150-page draft final report that was approved yesterday. The ball is now in the SEC’s court; Corp Fin Director John White remarked during the meeting that the SEC will have an open mind regarding the Committee’s recommendations. No timetable for that consideration was announced.
Learn more from FEI’s “Section 404 Blog,” including their two pages of notes from the meeting.
17,000 Comments on the SEC’s Executive Compensation Proposal!
With the April 10th deadline safely behind us – although comment letters will continue to dribble in, such as the forthcoming ABA letter – I thought it would be a good time to link to letters submitted from the more noteworthy market participants rather than have you slug through the nearly 17,000 letters that have poured in on this hot topic.
That number is a little misleading because the AFL-CIO was successful in having its members send in over 16,000 letters of this variety! Quite an impressive mobilization of the troops (unless software was used to bombard the SEC with a bunch of identical comment emails – wonder if that’s possible?)!
The comment letters listed below are in no particular order (and apologies to the many others that submitted letters – it’s dizzying to scroll through and pick through the list of comment letters on the SEC’s site):
You may find a recent survey regarding December year-end companies that filed their 10-Ks late both interesting and useful. As widely reported, the number of late filers declined 30% from last year (although still triple from ’03 levels), which could be expected given that this is the second year of internal controls and companies (and their auditors) had more of a “grip” on their 404 obligations this time around (remember that last year was a record year for 12b-25 filings, as noted in this blog).
Note that only about 25% of the companies filing late also reported a material weakness, down from around 50% last year. This is a little surprising as an inability to be able to close your books and get your financial reports done within two and a half months should be a pretty good indicator that you don’t have adequate internal controls. Also check out the interesting statistic that over 80 companies filed late for both the past two years – these companies were much more likely to report a material weakness (in fact, it’s surprising that not all of these companies didn’t report a material weakness given they were late two years in a row). We have posted the recent Glass Lewis survey (and this addendum) in our “Rule 12b-25″ Practice Area.
The Latest Internal Control Fee Studies
As widely reported, two new studies – one from FEI and another from CRA – have been released indicating that the costs of 404 compliance has gone down, while audit fees have increased. Rather than rehash the study findings, you can read this NY Times article or look at the studies themselves which we have posted in our “Internal Controls” Practice Area.
By the way, the SEC and PCAOB announced yesterday that they have set their next internal controls roundtable for May 10th.
Practical Considerations: Implementing a Majority Vote Standard
We have posted the transcript from the popular webcast: “Practical Considerations: Implementing a Majority Vote Standard.”
More on the Perils of Conducting the Internal Investigation
From Bruce Carton’s “Securities Litigation Watch“: Not too long ago, a lawyer or firm getting hired to conduct an internal investigation into a company’s possible securities law violations was the beginning of a usually lengthy, no-lose gravy train. Get a team together, map out all the documents and witnesses from which to gather information, bill heavily while collecting all of this information (and then while writing up a brilliant report), collect a big check, and move on.
Lately, however, some downside seems to be emerging in the internal investigation business. We first observed in November 2004 that prosecutors in the Computer Associates criminal case charged the former CEO of the company with obstruction of justice based on statements he made not to any government official but rather to the company’s outside counsel (Wachtell Lipton), which was conducting an internal investigation of the matter. In a sense, the prosecutors’ “deputized” the lawyers conducting the internal investigation by taking the position that a false statement made to an outside lawyer conducting an internal investigation is obstruction of justice when the outside lawyer is doing the investigation with the purpose of giving that information to the government.
Next, we discussed in this post the SEC’s reported Wells call threatening enforcement action against a lawyer who conducted an internal investigation into possible financial fraud at Endocare. The underlying article did not say exactly what the lawyer did to provoke the SEC, but the company had earlier issued a press release last year saying the probe the lawyer conducted found no “intentional wrongdoing by management.” The article referenced a speech by then SEC Enforcement Director Stephen Cutler, in which he stated that he was “concerned” that some lawyers hired to investigate signs of fraud might have helped cover it up.
As also discussed in the article, one former SEC assistant enforcement director noted that if the SEC proceeded with this case, other lawyers might think very hard before taking on company investigations and “there will be some firms who look at this and say we will never do another….” Notably, the SEC does not appear to have proceeded with any lawsuit against the lawyer in the nearly year and a half since the Wells call was reported.
Most recently, an article by Lynn Hume in today’s Bond Buyer states that the San Diego city attorney intends to sue the law firm Vinson & Elkins for an internal investigation report that he says was a “whitewash” that failed to hold city officials fully accountable. The city attorney claims that V&E was part of an effort to “help the people that were under investigation escape responsibility because that’s where the money was.”
With proxy season in full swing, I fear picking up the paper in the morning since it seems like there is a new story of a CEO making a killing at the expense of shareholders each and every day. Since our CompensationStandards.com mission attempts to focus on the positive – such as these CEOs That Have Set An Example – I have refrained from carping on some of the mind-numbing CEO pay levels that have been disclosed recently.
I can’t help but wonder how the boards reacted at these companies when they realized that they have doled out pay packages that have reached payouts in the aggregate that exceed a billion dollars (yes, that’s billion with a “b”). You would think that their reaction would be a “Holy Cow” moment. If not, maybe they have served on the board too long?
And as Mike Melbinger has been discussing in “Melbinger’s Compensation Blog,” it appears that the culture of greed has spawned more allegations of suspicious timing of option grants to senior managers. [Get a load of today’s WSJ story about the UnitedHealthcare CEO who now wants to rein in his – and other senior managers – pay. Easy for him to say now that he has over $1.6 billion in unrealized option gains. With rampant allegations of option-backdating, this guy is backpedaling fast.]
On his “Proxy Disclosure Blog,” Mark Borges has provided numerous examples of what companies are disclosing now about perks – and there have been a fair number of interesting disclosures. Mark’s analysis of proxy statements as they have been filed has been invaluable to those of us grappling with the SEC’s changing expectations.
For a more humorous – and more critical – take on recent perk disclosures, check out Michelle Leder’s footnoted.org. Below is one of my favorites from the related party category…
Driver’s Ed on the Company Dime…
From footnoted.org: “As with many professional sports, making it to the top of the professional racing circuit can take years of hard work and plenty of near-death experiences. Michael Waltrip, pictured here with his car, is one of the success stories. Now Waltrip’s company is helping two sons of Aaron’s Rent (RNT) executive Bill Butler train to become race car drivers courtesy of the company. In the proxy that the company filed on Friday, the company noted that Aaron’s is sponsoring Waltrip’s “driver development program” and that the two drivers participating in the program in 2005 are Butler’s sons. But here’s the real kicker: Aaron’s estimates that it paid $890K last year to train Butler’s sons and will spend nearly $1 million this year on the program.
So what exactly are the Butler boys — known as KBIII and Brett — learning for this money? This article that was sent out to Aaron’s franchisees details the program:
During the work week, KBIII and Brett learn about the cars they race and how to build them, repair them and make them perform faster. They train their bodies for the rigors of racing. They learn strategies for winning races. Then, come the weekend, they put it all to the test.
We’re guessing that since dad — Aaron’s Sales and Lease Ownership President Bill Butler — only made $425K last year, paying twice that amount to teach your sons to be professional drivers was probably out of the question. But getting the company that you work for to pay for that training and counting it as a marketing expense, seems like a very creative use of accounting rules.”
Personal aside: I don’t know about you, but I hated driver’s ed. Creepy phys ed teacher and I already could drive better than him. Can you believe there is a forum where folks discuss bad driver’s ed experiences…and then you have this movie entitled “Hell’s Highway – The True Story Of Highway Safety Films”…
This article from Sunday’s NY Times touches on the other half of the majority vote debate – what to type of integrity exists in today’s voting process now that votes in director elections could mean much more than they do today? The article parses a recent study entitled “Vote Trading and Information Aggregation” from a group of professors that found, over a two-year period, that there was a significant spike in the number of borrowed shares on the typical record date. And they found an almost-as-big decline in such shares, on average, the day after those record dates. In their opinion, the only plausible explanation is that traders borrowed shares solely to acquire votes.
This is not “new” news really, as there have been reports going back a while of funds buying votes without economic risk. In fact, when DealLawyers.com was launched at the end of 2004, one of the first queries in that Q&A Forum (ie. #3) dealt with the ability of such a hedge fund to use Schedule 13G (as opposed to Schedule 13D) when such an arrangement resulted in the fund holding more than 5% of a company’s stock.
What About Overvoting?
Interestingly, the NY Times article (and the study) doesn’t delve into the topic of overvoting – a topic that I was interviewed about last year (see this related blog). This issue and more surely will draw more scrutiny of the voting process, which may very well be tested in court when director elections are too close to call under a majority vote standard.
My Ten Cents on the SEC’s Journalist Subpoena Saga
I know the First Amendment is important, even more so now that I call myself a “journalist” when folks ask what I do for a living (and if you ever lived in DC, you know that is the first question you get asked at a cocktail party). But I still can’t believe how much press was given to the SEC’s new policy regarding journalist subpoenas – since Chairman Cox first noted that the policy was forthcoming a month ago, I must have read two dozen articles about the topic.
As this NY Times article noted last Friday, “Before the Gradient inquiry, officials said they could recall no other instances of subpoenas of journalists other than in some well-known insider trading cases involving journalists in the 1980’s and 1990’s. In those cases, unlike the Gradient inquiry, the reporters were the subjects of the investigation.” Sure sounds like the SEC’s Enforcement Division wasn’t abusing their power in this area…at least not before the latest hubbub (which, depending on what really happened, appears to an isolated case at most).
With sunset quickly approaching, this should be a big week for the SEC’s Advisory Committee on Smaller Public Companies. Last week, the Committee held a teleconference meeting to further consider the draft of the Advisory Committee’s final report, which is scheduled to be adopted at their meeting this Thursday (and must be submitted to the Commission before April 23rd, the sunset date for the Committee).
Under the Committee’s draft recommendations, a tier of the smallest public companies (based on market cap and revenue criterion) would continue to be exempt from the internal controls requirement “unless and until” a suitable framework is developed for these companies to meet 404 in a cost-effective way. Additionally, the next largest tier of companies (also based on market cap and revenue) would be exempt from external auditor involvement in their 404 process (resulting in a self-assessment) until a suitable framework is developed.
During last week’s teleconference meeting (here is an audio archive), the Committee discussed whether it should revise its proposals relating to SOX 404 relief, given that some Commissioners have been reported to be opposed to giving a complete 404 pass to smaller public companies. The upshot of the teleconference meeting: no Commissioner has taken a formal position on the Committee’s proposals – so going into this week, the Committee decided to keep the proposal “as is” with minor changes. Learn more about what happened at the meeting from FEI’s “Section 404 Blog.”
More on Nasdaq Issuer’s Transition From 12(g) to 12(b) Registration
On April 6th, the SEC approved a rule change that allows Nasdaq to file a single application on behalf of its issuers to transition their 1934 Act registration from Section 12(g) to Section 12(b).
As I blogged about a few months ago, new NASD Rule 4130 provides that each company authorizes Nasdaq to file the transition application with the SEC (unless they have opted out) immediately preceding the day the Nasdaq begins operations as an exchange (which can happen any day now). Companies that opt out won’t be eligible to be listed when Nasdaq begins operations as an exchange (unless it files its own 12(b) application).
At the SEC Speaks conference in early March, the Staff indicated that it was leaning towards not issuing new Exchange Act numbers for this transition, so Nasdaq companies likely will continue to have “0-” numbers. CIK numbers would also remain the same.
Business Roundtable’s 4th Annual Governance Survey
Recently, the Business Roundtable published its 4th annual survey of corporate governance practices among its members, showing continuing improvements in corporate governance practices, including these findings:
– Pay-for-performance – 57% report an increase in the pay-for-performance element of senior executive compensation in the past year, compared to 49% in 2005 and 40% in 2004. Of the companies placing more emphasis on performance, 20% indicate that the performance element includes primarily long-term goals, 73% stress a mix of long- and short-term performance goals, and only 7% stress short-term goals.
– Board independence – 91% have an independent chairman, lead director or presiding director – up from 83% in 2005 and 71% in 2004. The percentage of companies with an independent chairman has continued to increase, from 4% in 2004 and 9% in 2005, to 11% in this 2006 survey.
– Executive sessions – 69% reported that independent directors met in executive session at every board meeting in 2005, and 75% expect the same for 2006. This percentage is up from 68% in 2004 and 55% in 2003.
– Shareholder communications – 91% have established procedures for shareholder communications with directors, up from 90% last year and 87% in 2004. And 93% of companies say their Nominating/Governance Committee is willing to consider shareholder recommendations for board nominees, a steady increase from the 85% of companies in 2005.
– Costs of Sarbanes-Oxley – Sarbanes-Oxley costs appear to be declining, with 94% expecting costs to either remain the same (42%) or decrease (52%) for 2006, and only 6% projecting that costs will go up this year. The portion of companies reporting estimated costs of more than $10 million dropped to 40% from the 47% reported in 2005.
– Director evaluations – 38% performed individual director evaluations in 2005 and 45% are planning to do such evaluations in 2006, up sharply from the 27% in 2004. Of these companies, a growing number rely on peer reviews – 38% in 2005, and 48% planning to do so in 2006.
– Director qualifications – 97% say their Nominating/Governance Committee has established qualifications for directors, a significant increase from 87% in 2005.
– Committee meetings – 52% indicate they have seen a “significant” increase in the number or length of meetings of the Audit Committee in the past two years, while 33% indicate a “significant” increase in the number or length of meetings of the Compensation Committee in the same period.
– Compensation consultants -85% report that they have retained a compensation consultant in the last year, and 53% of CEOs report that their Nominating/Governance Committees have retained a search firm in the last year.
– Stock ownership requirements – 93% say their compensation committees have stock ownership guidelines or requirements for senior executives and 88% of companies have stock ownership guidelines or requirements for directors, with 32% establishing the director guidelines within the past year.
On Monday, Chairman Cox announced Andrew “Buddy” Donohue as the next Director of Investment Management. Donohue, 55, is currently the Global General Counsel for Merrill Lynch Investment Managers and is also Chairman of ML’s Global Risk Oversight Committee. Mr. Donohue graduated from Hofstra University and earned his J.D. from New York University School of Law. He will be sworn in by Chairman Cox on May 15, 2006 and will have many interesting issues to deal with, as we blogged about on Monday.
With this announcement, only three more top positions remain to be named: Market Reg Director, SEC Chief Accountant and PCAOB Chair.
More on the SEC’s Subpoena-Gate
Yesterday, the Commission issued a Policy Statement for Staff members to follow when seeking information from the press. In the Policy Statement, the Commission sets forth 13 guidelines/procedures for the SEC Staff to follow to ensure that “vigorous enforcement” of the securities laws is conducted “completely consistently” with the principles of the First Amendment. The guidelines are intended “to avoid the issuance of subpoenas to members of the media that might impair the news gathering and reporting functions.” Among other things, the Statement requires that the Director of Enforcement, in consultation with the SEC’s General Counsel and with notification of the Chairman, authorize any subpoenas to the media.
This Policy Statement will hopefully put to bed this issue, which began in late February 2006, when news reports appeared about the SEC serving subpoenas for records of columnists for MarketWatch and Dow Jones Newswires in an investigation about possible stock fraud involving Overstock.com and where Chairman Cox took the unusual step of halting the subpoenas.
I have added a cool site – The Directormap Project – from Jackie Cook, a Senior Research Associate at The Corporate Library, to our “Majority Vote Movement” Practice Area. The site publishes the results of director elections, including a chart of the director results for the past few years and another chart showing the largest spread between the least supported board nominees and the average of other nominees (with more than a 30% difference). Jackie also has put together this page that lists all the majority vote shareholder proposals that will be on the ballot this year, including links to the proxy materials of each company and their annual meeting date. Thanks to Jim McRitchie over at CorpGov.net for pointing this out!
More Majority Vote Proposal Results
As ISS reports in this article, the majority vote proposal at Morgan Stanley’s annual meeting last week received only 40% of votes cast. Morgan Stanley is among those companies adopting director resignation policies – and this showing was similar to the support received last month by shareholder proposals at three other companies that have adopted director resignation policies (as noted in this blog).
In comparison, a majority vote proposal at Novell’s annual meeting two weeks ago won 61.7% of votes cast – that company has not adopted a director resignation policy.
Disaster Planning
In this podcast, Glenn Pomerantz, a Director of Insurance Claim Services at BDO Seidman, provides some pointers regarding disaster planning, including:
– What are companies doing these days to prepare for natural disasters?
– Is there really any way to prepare for disasters like Hurricane Katrina?
– Which industries are most vulnerable?
– What can businesses expect from their insurers?
– How are things looking in New Orleans?
