Late last week, it was reported that Coca-Cola has adopted a policy of obtaining shareholder approval for its severance arrangements with senior executives if the payout exceeds 2.99 times the sum of the executive’s annual base salary and bonus. The topic of excessive severance pay angers investors more than any other compensation issue – and the recent House bill would require shareholder approval of all severance arrangements for officers.
According to this WSJ article, “Coke spokesman Charlie Sutlive said the company’s board approved the policy in October. It was first publicized yesterday by the International Brotherhood of Teamsters General Fund, which, as a Coke shareholder, unsuccessfully proposed a similar policy at Coke’s annual meeting in April.
Coke’s board opposed the proposal at the time. However, the measure earned support of roughly 41% of shares cast, indicating strong interest among investors.
“We believe this new policy both responds to and is in the best interests of shareowners,” Mr. Sutlive said. He said the board and its compensation committee adopted the policy after noting “the sentiment of many shareowners,” including the Teamsters.
Mr. Sutlive said the new policy reflects the board’s practice of reviewing corporate-governance policies and improving them where warranted. In this case, he said, the board’s compensation committee recommended the policy as a way to add controls while continuing to allow the board to render “prudent judgments.”
The move by Coke comes amid some criticism of executive pay. Steven Hall, a New York-based compensation consultant, said measures such as the one Coke adopted could serve to limit severance deals going forward.
Coke was criticized for the $17.7 million separation package it awarded to former Chief Executive M. Douglas Ivester, who stepped aside in early 2000 after about two years in the job. Steven J. Heyer, who left as Coke’s No. 2 executive in 2004, received a severance package of at least $24 million after three years on the job.
Douglas Daft, who stepped down as Coke chairman and CEO in June 2004, received 200,000 restricted shares of Coke, valued at $8.8 million at the time.”
In Sunday’s NY Times, Gretchen Morgenson wrote about this development in her column, including quotes from NASPP Chair Jesse Brill and Mike Kesner of Deloitte Consulting, who have spoken on this topic at our annual compensation conferences. Learn more about how to handle severance pay in our “Severance Arrangements” Practice Area on CompensationStandards.com.
SEC Posts Proposing Release for Non-US Company Deregistration
On Friday, the SEC posted the proposing release, under which it would be easier for foreign private issuers to deregister and terminate their SEC reporting obligations. European organizations have been urging this response to a perceived “Hotel California” problem for several years.
However, it is predicted that only a few dozen companies would take advantage of the new rules if adopted. On the other hand, these rules could curtail this problem: many companies have decided to list on the London Stock Exchange rather than a US exchange over the past year. So the rule changes might entice non-US companies to list on the NYSE and Nasdaq again.
Under the proposal, a foreign company that is listed in its home country would be able to terminate the SEC registration of its shares if it has been registered for two years, has filed all required SEC reports, has not offered its securities in the U.S. market for a year (including in a Rule 144A transaction or other private placement) and meets one of two quantitative tests:
• The first test, which is available to all companies, requires a deregistering company to have 5% or less of its public float held by U.S. residents.
• The second test, available only to well known seasoned issuers (generally companies with a market capitalization of at least $700 million) would increase this threshold to 10% for companies that have 5% or less of their worldwide trading volume in the United States.
SEC Finally Issues PCAOB Proposal re: Reporting on Previous Material Weaknesses
Late last week, the SEC finally issued the PCAOB’s proposed Auditing Standard No. 4 regarding reporting on whether a previously reported material weakness continues to exist. Comments are due to the SEC 21 days from publication in the Federal Register. The PCAOB originally issued AS-4 way back in July – AS-4 will not become effective until approved by the SEC.
Here is a recap of AS-4 from Mike Holliday: “AS-4 would be for a voluntary engagement at the request of the company, to enable the auditor to express an opinion on whether a previously reported material weakness in internal control has been eliminated. It would apply only where the material weakness has been identified in an auditor’s previous report on internal control issued pursuant to Auditing Standard No. 2. AS-4 would permit reporting on the elimination before the next AS-2 audit assessment of internal control, which is normally as of the fiscal year-end. (Additional requirements would apply to a successor auditor.)
Because the audit of financial statements and AS-2 audit of Internal Control normally occur only as of fiscal year-end, in the usual case AS-4 normally would be limited to material weaknesses identified in the annual assessment process. NOTE that in the usual case where the audit of financial statements occurs only at fiscal year-end, AS-4 would not apply to a weakness discovered during an interim period and eliminated in an interim period prior to the next annual assessment — for example, a weakness identified in the second quarter and eliminated during the third quarter would not be covered.
One of the main comments of investors to the PCAOB, in response to the March 31, 2005 request for comments, was to allow auditor reporting on material weaknesses identified subsequent to the company’s most recent annual assessment of internal control over financial reporting. The PCAOB did not accept that comment and retained the limitation to material weaknesses previously reported by an auditor in an AS-2 audit of internal control in conjunction with an audit of the financial statements.
Yesterday, the SEC posted the adopting release relating to the new accelerated filer definitions and deadlines.
The SEC found good cause to forego the normal 30-day waiting period for these new rules – and thus accelerated the effectiveness of them. If I understand Section III.D of the release correctly, all calendar year-end 10-Ks will need to include the check box to indicate whether the company is – or is not – a large accelerated filer (ie. LAF), even though the deadline for LAFs is the same 75-day period as it is for accelerated filers during ’06.
In addition, the SEC applied the new exit test retroactively so that accelerated filers can exit this year based on their Q2 ’05 float. This is noteworthy for some issuers that can take advantage and exit now, since I believe they can then skip the hassle of obtaining a 404 attestation until ’07 (even if they filed their 404 attestation for their last fiscal year).
Going Dark and Going Private Transcript is Up!
We have posted the transcript for the popular DealLawyers.com webcast: “Going Private and Going Dark.”
Contest Winner for Unclassified Category of Issuers!
Regarding my earlier blog on the lack of classification for a narrow group of issuers – the winner is “INECs,” which stands for “issuers, not elsewhere classified.” The winning member is now driving around town in a ’73 Beetle with our logo on the car doors…
Ode To A Fraud: A Humorous Take On SOX
From Scott Cohen of Compliance Week:
‘Twas the night before Christmas and most of the hires
were back in their houses, in front of their fires.
All toasty inside as Northeasterlies blew,
naïve of my plan, yes, they hadn’t a clue.
And as the lights sparkled and as their kids knelt
to open their toys (or their Hanukkah gelt)
and gifts were exchanged—here a train, there a jewel—
and meals were devoured with dribble and drool,
I sat in my office, cast under a pall,
and patiently waited and watched the snow fall.
The lights had been dimmed and computers were down,
the hallways were barren—there wasn’t a sound.
Except for old Jasperhams, typically juiced,
who handled recycling the reams we produced,
had chosen that moment to tidy about.
I gently persuaded him: Get the hell out.
So through empty hallways as I did maraud,
I knew that the time had arrived for my fraud!
How perfect an eve of deceiving, I beamed,
a night for my swindle, my racket, my scheme!
Constructed in summer and fostered in fall,
‘Twas daring, audacious … the nerve and the gall!
A plan based on timing, by my own admission,
advanced by the exodus from the Commission.
Yes, SEC veterans, bailing, they flew,
On Goldschmid! On Cutler! On Donaldson, too!
With turnover rampant, and chaos set in,
at last my deception, my scam, could begin!
My goal was pure evil, a dastardly deed,
a scandalous racket inspired by greed.
‘Twas really quite simple, but one that still shocks:
to undermine every provision of SOX.
Yes Sarbanes and Oxley, so feeble and dense,
who doled legislation that lacked common sense;
the thoughtless decrees that you morons inscribed
would soon in their whole be defaced and defiled!
I started out slowly, with SOX 301:
by snipping the lines on the phones, oh, what fun!
Thus blowers of whistles had no tool to sort
our audit committee their whining report.
I then took my pen to our corporate code
of suitable conduct (good God, what a load!),
deleted decrees that the board said: “Obey,”
and wrote down, “Just do what you want, it’s okay!”
Then freed of restrictions I rolled up my sleeves
and tackled more regulatory pet peeves.
For certification of SOX 302,
I crossed out my named and signed, “Winnie the Pooh.”
Pro forma financials all settled with GAAP,
I quickly unwound and made tricky to map.
For “plain English” filings (which I cannot speak)
I crafted disclosures in Yiddish and Greek.
“Good God, this is simple!” I cried of my prank
(I guess that it’s my MBA I should thank!).
So SOX 404, let us dent you as well:
I’ll simply erase key controls from Excel.
I then found some insider rules to evade:
A pension fund blackout within which to trade.
The “two-business day” rule was next to ignore:
I waited a fortnight to file my Form 4.
For bookkeeping rules that are overly stringent,
(off-balance sheet deals and arrangements contingent)
I structured some entities, all of them fake,
ensuring transparency now was opaque.
And measures impacting resources and risk
were moved from my hard drive to some floppy disk
unreadable by any modern machine:
derivative instruments … ne’er to be seen!
Now SOX 407 was easy to shirk,
I breached that directive without any work:
Our “financial expert” knows nothing, dear Cox,
his audit skills can’t fill a cereal box!
And then my attention did finally turn
to those who created my awful heartburn:
My trusted accountants, my partners, my friends,
whose counsel and leadership gave me the bends.
So SOX 303: You be damned, I decreed!
and swiftly began to coerce and mislead,
manipulate, obfuscate (hey, it’s a waltz!)
let’s bribe, threat, and document things rude and false!
To frame my dear auditor, this was quite grand:
I gave him some non-audit work that was banned.
‘Cause, hey, how much profit must they really earn?
Why, I oughtta give them a “going concern.”
And wanting my auditor’s fall guaranteed,
the rules of the dreaded PCAOB
must be disobeyed (they are way too damn stringent):
more tax shelters, please, and commissions contingent!
And last on my list: Why my lawyers, I’ll call!
Confess everything, force a noisy withdrawal,
then phone all our analysts, give them a plea
of non-public facts that defy Reg. FD.
And looking back over the rules I had breached,
I smiled to myself … I had finally reached
the goal to which my Christmas Eve had aspired:
Defying the rules that old Sarbox required.
Oh relish this moment, ye governance punks,
Like feisty Nell Minow and Bob A.G. Monks,
and Yerger and those who prod corporates with wit,
like Lally, Anne Simpson and Millstein and Pitt.
And governance “raters” who think you’re so blessed,
like proxy advisors (that’s you, ISS),
Glass Lewis and Moody’s, get back in your den,
I’ve just undermined the whole ICGN!
And as I strolled, grinning, outside in the lot,
I never did grasp the one thing I’d forgot:
That back in the office, and this was quite sloppy,
I’d dropped on the floor my diskette that was floppy.
And Jasperhams, damn you, old man! How you dare
conspired to capture my disk unaware,
and transfer to counsel a thorough report
that caused all the lawsuits that led to the court.
And though I claimed innocence (how I did plead!)
the jury said, “guilty,” the judge then agreed,
and though I had fainted and mustered some tears,
the sentencing judge gave me two hundred years.
And that’s why this winter—this cold, cold wet day—
I’m not on my yacht with my Klee and Monet,
but stuck in a cell wearing dirty striped shorts,
with Ebbers, Kozlowsi, Lay, Rigas and Swartz.
And thus, my dear friends, lies a lesson of risk:
That bastards like Jasperhams may find your disk.
So trust me: the law is a thing you can’t duck.
So Sarbanes and Oxley: I guess I’m the schmuck.
Yesterday, Corp Fin added some phone interps on Regulation AB to its Telephone Interpretation Manual – as well as added a new index page. The Manual is now split into discrete PDF sections coded, rather than posted as a single file – although the five Manual supplements are still separate and not integrated yet.
The new look is nice, but I am bummed that the sections are no longer alpha-numbered so that a particular interp can be easily referenced (eg. “I.84” instead of now having to say “#84 in the ‘Regulation S-K’ section” like I just did in answering a query in our Q&A Forum). Other members have complained that they wish a PDF of the entire Manual was still available so that it could easily be word-searched or printed out. Maybe Santa will hear us?
[Of course, we still have our searchable, HTML version of the Manual posted – but it will be difficult to maintain this version if the Staff makes piecemeal changes to the Manual going forward.]
This is an encouraging sign and perhaps means that Corp Fin’s long-standing project to update the Manual will be in full swing during ’06. Quite a challenge for the Staff to undertake as the last comprehensive update was in 1997 – and things sure have changed a bit since then!
Scrushy’s Latest Maneuver: The Shareholder Proposal Angle
Everytime I hear the dude’s name, I roll my eyes. Now Richard Scrushy has been rejected by Corp Fin in his attempt to use 14a-8 to amend the HealthSouth bylaws so that a majority of shareholders could fill board vacancies and set the number of directors on the board. Note that the former HealthSouth CEO submitted his proposal before he was indicted again – this time for political corruption – and before he sued HealthSouth for $70 million in back pay. This guy has some gall, eh?
On December 9th, the SEC Staff agreed with Healthsouth that Scrushy’s proposal could be excluded after the company argued that the proposal would result in a “pro rata” vote that deviates from the “one share, one vote” rule under Delaware law.
S&P 500 Governance Survey
This new Spencer Stuart survey regarding the S&P 500’s corporate governance practices shows considerable progress having been made in recent years. At the same time, it highlights a number of shortcomings. Here are some of those shortcomings, as noted by former SEC Chief Accountant Lynn Turner:
1. 12% of boards still have no women; 43% of these companies are in the high technology industry, often in California.
2. Lead directors are commonplace with 94% of the boards with them, compared to only 36% in 2003. Directors as a whole are more “independent” than before SOX as defined by the listing rules.
3. However, the CEO still chairs most boards, and where they don’t, the chair is usually not independent. As a result, the leader of the vast majority of the boards is not independent. However, the number of boards with a truly independent board chair, something almost unheard of just 5-6 years ago, is now up to 9%.
4. Audit committees appear to have changed little, most likely due to the SEC “watering down” the requirement for a “financial expert” over the objections of investors. As a result, it appears there probably are a lot of people who are not real experts in the field of financial reporting who are still designated as financial experts. As noted in the attached survey, audit committees still often do not have a board member who has been a CFO, controller or CPA. The number of audit committ members with CFO and accounting backgrounds remains at only 9% in 2005, the same as in 2004.
Accordingly, board oversight of the financial reporting process is probably still not what it should be. Often these so-called “experts” are probably challenged at best – if not fully unable – to deal with many typical issues, such as financial reporting questions; discussions of what are the necessary internal controls over accounting and disclosure; and auditor independence issues.
Some analysis from Keith Bishop: “Here is an opinion – from Newcastle Partners v. Vesta – from Vice Chancellor Lamb last month that is interesting for two reasons. First, there is an interesting historical discussion of Section 14(c) under the Exchange Act.
Second, he reaches the conclusion that state law, specifically Section 211 of the Delaware General Corporation Law, trumps the federal proxy rules. He reaches this conclusion based on the internal affairs doctrine (citing VantagePoint v. Examen, the subject of several recent blogs). Despite what the Vice Chancellor states in the opinion, I do think that there is a clear conflict between the proxy rules and Section 211.
As an aside, I wonder how Corp Fin feels about there telephone responses making it into the record (see page 4 of the opinion)?” I have posted a copy of the opinion in our new “Internal Affairs Doctrine” Practice Area.
SEC Chairman Roundtable
Today, the SEC is hosting another interesting roundtable, this one featuring a slew of former chairmen.
Recently, the SEC Historical Society has added some cool content to its site, including information regarding the first chairman, Joseph Kennedy.
What’s Doing Under the New SEC Chair
Yesterday’s WSJ ran an article about the new SEC Chair’s course of action so far, with a particular focus on Chairman Cox’s attention to detail and the numerous vacancies of top staffer jobs. Here is a snippet from the article:
“One result of his approach is longer meetings. Private commission meetings where enforcement staff present cases last for several hours, with Mr. Cox peppering lawyers with questions, debating the merits of each case and asking for detailed descriptions — rather than summations — of each case.
While some viewed Mr. Donaldson as too detached, there are concerns that Mr. Cox’s desire to be involved in every decision is grinding the agency to a halt. Perhaps the biggest complaint centers on Mr. Cox’s failure to select directors for either the investment-management or market-regulation divisions. SEC lawyers said the two offices are essentially paralyzed, since there is no liaison to the chairman’s office and no one to float staff ideas upstairs or transmit marching orders from above.”
Celebrities and the SEC
Nothing works better for the SEC’s Enforcement mission than cases that attract a lot of media attention. That is because the SEC’s limited resources can only do so much against the high volume of fraud out there.
So there should be some real bang for the buck from yesterday’s announcement that former Sirius Satellite Radio executives engaged in insider trading before the news of Howard Stern’s hiring became public. [Driving back from a speaking gig in Philly last Friday, I came across Howard’s last show on FM radio. Maybe I am too sensitive a guy, but Howard just doesn’t do anything for me. In fact, I do eat quiche.]
And the poker world is riled because it has been disclosed that the SEC is investigating poker legend, Doyle Brunson, over his $700 million takeover bid for the World Poker Tournament (run by WPT Enterprises). The SEC said the formal investigation is focusing on the legalities of Brunson’s offer and the subsequent decision to publicize it. Learn more about this development from this poker blog.
Here is an interesting article describing a trustees’ meeting during which Florida Governor Jeb Bush and two other state leaders ordered Florida’s public pension fund Tuesday to take a leading role nationally to push for corporate governance reform. They specifically want to target “outrageous” executive compensation and “undemocratic” proxy voting at public companies. The two other state leaders are Republicans hoping to secure the governor nomination when Bush’s term expires.
Told ya that executive compensation was gonna be a political football. First, the Democrats grabbed onto the mantle with it’s recent proposed legislation – now the Republicans are taking a turn…
More on Exec Comp Practices
Here are three more recent newsworthy articles on executive compensation:
– USA Today ran this article on a letter sent to the SEC from a worldwide group of institutional investors regarding compensation disclosure practices
– Yesterday’s NY Times had this column on a CEO who refused a pay raise (and sent this letter to his own compensation committee)
– Yesterday’s NY Times had this column on Delphi’s employees being asked to take huge pay cuts, while upper management implemented a bonus plan for itself
Update on the “Pink Sheets”
If you missed it, Saturday’s WSJ carried an informative article on the recent overhaul of the pink sheets. Here are some interesting points from the article:
– Starting this spring, there will be an elite list of issuers that report more information than legally required
– The changes of the Pink Sheets are so dramatic that an SEC official says the agency is monitoring its progress to make sure it doesn’t accidentally become a stock market.
– As it stands, the Pink Sheets is essentially a publishing company as large investors known as “market makers” pay Pink Sheets to list their bids and offers for their inventory of “over the counter” stocks.
– Pink Sheets issuers aren’t required to file documents with the SEC, though the market makers and brokers that provide quotes are regulated by the National Association of Securities Dealers.
– Pink Sheets now exclusively quotes 4,800 issuers, including several giants that filed for bankruptcy-law protection
Companies Without a Home?
Some thoughts from an introspective and anonymous member: “My wife’s late grandmother belonged to a religious sect that did not believe in formalities, including having a name for the sect. Consequently, some people referred to them as the “no-names.”
The SEC seems to have also created a no-name category. It seems we now have small business issuers, accelerated filers, large accelerated filers and well-known seasoned issuers. However, what is the name for the category of issuer that doesn’t fall within any of these four categories? I think calling them “non-small business issuers, non-accelerated filers, non-large accelerated filers, non-WKSIs” is a a little cumbersome. Also, it is a little strange to be defined by what you are not. Perhaps the SEC should have a name that category contest?”
Getting quite a few questions from members seeking law firm memos about the upcoming proxy season. In addition to our own checklist, these proxy season checklists from law firms are in the “Proxy Season” Practice Area, near the top.
And I recently posted the latest annual update of Alan Kailer’s popular chapter regarding preparation of the executive compensation tables.
Lord knows that the scope of this site is already too broad and I am not looking for more work. But I thought I would check in on the mutual fund world via this interview with Victor Siclari of Reed Smith on mutual fund compliance developments.
The Narrowing GAAP
This CFO.com article provides a good update on the convergence of US and non-US accounting rules and how it is happening quicker than most expected. As things are moving so fast, it probably is time to update our “Globalization of Accounting Standards” Practice Area…
At yesterday’s open Commission meeting – as noted in this press release – the SEC adopted some changes to the accelerated filing deadlines and definition of “accelerated filer”; established the new category of “large accelerated filer”; and changed the provisions to exit accelerated filer status (as well as adopted separate exit hoops for the new large accelerated filer category).
The SEC made a few tweaks to what it had originally proposed so that the framework now looks like this:
– The new definition of accelerated filer has a public float requirement of at least $75 million – but less than $700 million.
– Exiting accelerated filer status requires a public float of less than $50 million. This is a change from the proposal which had a threshold of less than $25 million.
– The new category of large accelerated filer has a public float requirement of $700 million or more
– Exiting large accelerated filer status has a public float threshold requirement of less than $500 million. This is a change from the proposal which had a threshold of less than $75 million.
– As proposed, the redefined accelerated filers will continue to have a 75-day filing deadline for Form 10-K and 40-day deadline for Form 10-Q.
The SEC deferred its proposal that the new large accelerated filers have a 60-day deadline for filing 10-K for fiscal years ending on or after December 15, 2005 for one year – so that large accelerated filers will continue to have a 75-day deadline for 10-K at this time, but will have a 60 day deadline for filing 10-K beginning with fiscal years ending on or after December 15, 2006. Large accelerated filers will continue to have a 40-day deadline for 10-Q, the same as for redefined accelerated filers.
The SEC also proposed amended rules to allow foreign private issuers to exit the ’34 Act reporting system – as well as proposed to amend the best-price rule (as I blogged about yesterday on DealLawyers.com).
Underwriting Agreements and Legal Opinions After the ’33 Act Reform
– Jack Bostelman, Partner, Sullivan & Cromwell LLP
– Fred Knecht, Managing Director and Head of Investment Banking Legal for the Americas, Goldman Sachs
– Mike McAlevey, Chief Corporate and Securities Counsel, General Electric Company
– John White, Partner, Cravath Swaine & Moore LLP
From Bruce Carton’s Securities Litigation Watch: Fortune has an excellent, in-depth article on SEC Chairman Christopher Cox entitled “The Stock Cop.” The article provides a detailed view of Chairman Cox and his life experiences, and includes the following description of a framed check that Cox keeps on the wall of his office at the SEC:
“That’s the message on the wall of his tenth-floor office in the SEC’s sun-washed new Washington headquarters, where Cox has assembled a makeshift shrine. It consists of a framed check made out to his grandfather alongside a plaque depicting the notorious Samuel Insull, whose empire of utility companies collapsed in 1929, taking with it the money of countless investors, including Cox’s grandfather. Insull’s chicanery helped inspire the creation of the federal regulatory apparatus, including the SEC, that sprang up during the Depression. But the lesson here isn’t historical as much as it is personal. Cox’s grandfather lost $6,000—or $70,000 in today’s dollars—and the check was intended to compensate for the loss. It’s for $3.36.” Cox’s message: Investors, I’m on your side.
Here are the results from our most recent Quick Survey, this one regarding director retirement ages:
1. Does your company have a mandatory retirement age for directors?
– Yes – 72%
– No – 28%
2. If answer to #1 is “yes,” does the retirement age differ for inside directors compared to outside directors?
– Yes – 26%
– No – 74%
3. If answer to #1 is “yes,” what is that retirement age for outside directors?
– Age 70 – 32%
– Age 71 – 0%
– Age 72 – 45%
– Older than Age 72 – 23%
4. If answer to #1 is “yes,” is that retirement age stated:
– In the corporate governance guidelines – 74%
– In the bylaws – 13%
– Both of the above – 11%
– Other – 2%
5. If answer to #1 is “yes,” directors must retire:
– At the next board meeting after reaching the retirement age – 7%
– At the next annual shareholders’ meeting after reaching the retirement age – 70%
– Other – 24%
Now it’s time for you to participate in our latest Quick Survey on Board Leadership! Thanks!
Section16Treatise.net is Launched!
In response to numerous requests, we have created an online version of the popular Romeo & Dye’s Section 16 Treatise and Reporting Guide: Section16Treatise.net. Dated as of Fall 2005, this 2nd Edition of the Treatise from Peter Romeo and Alan Dye is twice as long as the 1st Edition – and the online version of the Treatise has been updated from the hard copy Treatise mailed early in 2005 to reflect the SEC’s adoption of amendments to Rules 16b-3 and 16b-7.
We launched this site as many members have expressed frustration with the challenges of locating a copy of the popular Treatise within their own firm or company, as it remains the type of valued resource that everyone uses as a deskside reference. With this online resource, never go searching for that hidden copy again – try a No-Risk Trial today!
Breaking Barriers: The $1000 Billable Hour!
According to the latest National Law Journal billing survey, Benjamin Civiletti, the former U.S. attorney general and now chairman of the Venable law firm, is the first US lawyer to report charging $1,000 an hour. Apparently the old record was $875, charged by a London partner of Reed Smith.
Not really cause to celebrate – but it reminds me to prompt you to renew your membership to TheCorporateCounsel.net (and our other publications) now, as all our memberships run on a calendar-year basis and expire at the end of the month.
Can you believe that one full year’s worth of TheCorporateCounsel.net costs only as much as 45 minutes of Mr. Civiletti’s time (and we don’t clutter up the site with ads, etc.)!
Business Roundtable Issues Updated Governance Best Practices
In early November, the BRT issued an updated “Principles of Corporate Governance.” The BRT’s first Principles were released in May 2002. We have added these new guidelines to our “Model Governance Policies” Practice Area.
Here are some highlights from the updated Principles:
– Board leadership: The principles emphasize the critical importance of independent board leadership and, in recognition of the fact that no one leadership structure is right for every company. In a May 2005 survey, nearly 82% of member companies’ boards are at least 80% independent.
– Executive sessions: The principles recommend placing time for an executive session on the agenda for every regular board meeting, and follow-up with senior management at the conclusion of each executive session.
– Director-shareholder relations: The principles state that the board is responsible for responding to communications from shareholders and addressing issues of concern to shareholders – and contains an expanded set of best practice recommendations for boards in carrying out these responsibilities. In a May 2005 survey, 90% of BRT companies reported that they have established procedures for shareholder communications with directors.
According to this ISS article, union activist AFSCME has filed four more binding shareholder proposals seeking a majority vote standard. AFSCME was unsuccessful with its Paychex binding proposal two months ago, partially because the proposal didn’t contain a carve-out for contested elections (and thus didn’t obtain ISS support).
The article also notes that the Sheet Metal Workers International Association is targeting companies that have instituted director resignation guidelines – filing nonbinding proposals with ten of those companies.
Finally, in a meeting last Monday, the ABA Director Voting Task Force reiterated its support for the voluntary director resignation policy concept and said it plans to release specific recommendations and an explanatory report “no later than February 2006.”
SEC’s Attorney Responsibility Safe Harbors: Under Duress?
Last week, the Court of Appeals for the DC Circuit issued an opinion – American Bar Association v. FTC – that may spell trouble for the SEC with respect to the safe harbor aspects of its Part 205 Attorney Conduct rules. In its decision, the court affirmed the ABA’s view that a federal privacy law aimed at financial institutions (ie. Gramm-Leach-Bliley Act) does not cover the legal profession – as the ABA’s press release notes, “This ruling underscores that for more than two centuries we have rightly relied on state supreme courts to exercise responsibility for oversight in order to protect and safeguard the confidentiality of attorney-client communications and the public interest.”
The most recent entry in Knowledge Mosaic’s Soap Box does a little sleuthing of Corp Fin comment letters on internal control issues. Interestingly, only 50 comment letters posted on the SEC’s site contain the term “internal controls” – probably because the SEC is still playing catch-up in posting their comment letters issued since August 2004.
Here are some lessons learned according to Knowledge Mosaic:
1. Disagreeing with auditors can be a tough sell – Innovo Group, Inc. concluded that its internal controls were effective despite an auditor’s finding of material weakness. The SEC staff questioned just how the company could reach that conclusion in light of the finding. The company responded with an amended filing stating that their controls were, in fact, ineffective. Digital Recorders, Inc. believed that its disclosure controls were effective despite an auditor’s finding of material weakness in its internal controls. The company was asked to more fully explain how it could reach that conclusion. It did so in its subsequent 10-K filing, noting that the internal control weakness was limited in scope and that there were compensating disclosure controls in place.
2. Equivocating won’t wash – Both Proliance International, Inc. (formerly known as Transpro) and Rentrak Corp. claimed that their controls were effective, but noted certain exceptions. That didn’t fly. Your controls are either effective or they aren’t. Both companies submitted new filings acknowledging their controls to be ineffective. (See letters to Proliance and Rentrak, amended filings of Proliance and Rentrak.)
3. You gotta come clean – Comstock Homebuilding Companies, Inc. admitted to material weaknesses in its internal controls, but failed to provide any real detail on the nature of the problems. In response to the staff comment letter, the company’s amended filing used bullets to clearly identify six specific areas of material weakness.
Friday’s NY Times ran this article that laid out a proposed framework by Vice Chancellor Strine that would result in the elimination of shareholder proposals across the board. VC Strine himself doesn’t endorse this framework; he just proposes it as food for thought.
The framework goes like this: state laws are changed to allow contested elections of directors – outside of the takeover context – every three years. If insurgents, who would appear on the ballots sent out by management, received 35% of the vote, they would get some of their expenses reimbursed as well as have the chance to win the election. In exchange, shareholders would lose the power to be able to submit nonbinding resolutions to companies.
Although interesting, I believe the reality is that it would be very hard for companies and shareholders to come to a meeting of the minds on this. Whenever reform of 14a-8 is proposed by the SEC – which happens once per decade on average – a huge battle erupts. There simply is too much history behind the shareholder proposal rule to eliminate it entirely.
No Big Surprise: Corporate CEOs Lacking Public Confidence
The “lack of confidence” tone of this article from the NY Times on Friday is consistent with a letter recently sent to the SEC by a number of American, Canadian and European investors. Below is a quote from that letter that reflects why executive compensation is the #1 hot button for shareholders these days:
“Sixty companies in the bottom decile of the Russell 3000 lost $769 billion in market value and $475 billion in economic value over the five years ended in 2004, while paying their top five executive officers more than $12 billion.”
SEC’s Hedge Fund Rules in Peril?
According to news reports, pointed questions from two of the three paneled judges in the US Court of Appeals for DC over whether the SEC had the appropriate authority to regulate hedge funds indicate that a majority of the panel might vote to overturn the new rules that take effect in February.
Personally, I have no opinion as to whether the SEC overstepped their bounds – but I wouldn’t be surprised if the next spate of monumental frauds will be somehow interwined with the hedge fund industry. Anyone remember Long-Term Capital almost bringing the market to its knees?
