The SEC is holding an open Commission meeting next Tuesday at 10 am to consider the long-awaited ’33 Act proposal. This is the project that was derailed for a while due to the extensive Sarbanes-Oxley rulemaking that got dumped on Corp Fin.
NYSE’s New Interactive Tool
The NYSE has developed a pretty neat interactive tool that will facilitate the ability of listed companies to comply with their listing standard obligations. Learn more in my interview with Janice O’Neill, who is Vice President, Corporate Compliance at the New York Stock Exchange.
SEC Enforcement Goes After Audit Committee Member
Last week, in the SEC’s enforcement action against Ahold, it is not only notable that the SEC did not seek any fines due to extensive cooperation (the topic of an upcoming interview) – but it is notable that the SEC went after a member of Ahold’s audit committee, Roland Fahlin, for causing violations of the reporting, books and records and internal controls provisions of the securities laws.
Here is a quote from the SEC’s press release: “This case also reflects the failure of a member of the company’s audit committee to perform his duties to oversee the reporting process of a public company,” said James Coffman, Assistant Director of the SEC’s Division of Enforcement. “The proceeding initiated against Mr. Fahlin today demonstrates the Commission’s commitment to bring enforcement actions against those board and audit committee members who fail to perform these important duties.”
If you are registered for the October 20th compensation conference and intend to participate by webcast, you might want to print off the Speaker Materials before it starts (scroll down beyond testing instructions to access the Speaker Materials) – if you intend to attend in San Francisco, we will have those materials already there for you as a handout. And don’t forget, if you are participating by webcast, please test your ability to access streaming video before the 20th – here are instructions on how to test.
If you have not registered yet – but have now decided to do so – you can register by just walking in on the day of the conference in San Francisco – or if you wish to participate by webcast, you can still register online. However, we can no longer process any registrations by phone because all of our staff is already setting up for the conference at the hotel. (Please don’t call me either as I also am at the conference location to help set up.)
If you have a question about what a speaker says during the conference, please post it in the CompensationStandards.com Q&A Forum – and the speakers will try to post answers when they get back to their offices.
Remember that the program starts Wednesday at 7:30 am West Coast time – that is 10:30 am Eastern Time and 9:30 am Central Time. And all of the video will be archived – so you can jump in and out to watch segments as your day allows and come back to review anything you missed.
2005 Proxy Season Resource Center is Up!
We have updated our “Proxy Season Resource Center” for 2005 – if you are looking for something that you can’t find in there, please let me know and we will try to add it.
Here Come Those Disney Articles…
The significance of Wednesday’s Disney trial can’t be understated – and the media already is capturing that significance – see today’s NY Times and this article from today’s USA Today.
First Federal Judge Rules Sentencing Guidelines Entirely Unconstitutional
A week ago Wednesday, a few days after the U.S. Supreme Court heard arguments about the constitutionality of federal sentencing rules, U.S. District Judge Owen Panner in Portland concluded that federal sentencing guidelines are unconstitutional because it violated the seperation-of-powers doctrine in US v. Detwiler.
This is the first opinion to find the guidelines unconstitutional in their entirety under last year’s Feeney Amendment, which gave the executive branch far more say in sentencing decisions – but the immediate implications of the ruling are unclear because some of the issues that Judge Panner raised are before the US Supreme Court (and Judge Panner’s decision is likely to be appealed to the 9th Circuit Court). The Feeney Amendment, among other things, gives the executive branch power to appoint individuals to the federal sentencing commission, which considers such questions as what sentences are appropriate for certain crimes.
Judge Panner’s 31-page decision outlines specific objections to the new law, such as the US President can stack the Sentencing Commission with political allies, effectively taking control of a commission that is supposed to be a part of the judicial branch; law gives federal prosecutors too much power to pressure defendants into pleading guilty (noting even before the amendment, 99% of all federal criminal convictions in Oregon resulted from a plea, not a trial); and the law tries to intimidate judges because it requires that the U.S. House and Senate judiciary committees and the attorney general be notified when a judge departs from the guidelines and hands down a shorter sentence.
The New York Law Journal reported yesterday that a public company has filed a breach of fiduciary duty suit against a law firm and one of its partners for helping to enrich an associate who jumped from the firm to become general counsel of the company by creating generous golden parachutes (for the associate as well as other company executives).
And the major plaintiff firms are also getting into the executive compensation recovery business – check out this press release from Milberg Weiss about how it recovered $22 million in severance payments from 8 current and former officers at Florida Power & Light.
By the way, the Disney trial has been delayed two days – it now begins on October 20th – the same day as our compensation conference! To glean insight from the former and current Delaware Supreme Court Chief Justices about their thinking on executive compensation and director liability/indemnification – come hear the first panel of that conference. Last chance to register.
Reg FD Strikes the Howard Stern Show
Last week, the big news for loyal Stern listeners (sorry, I am not one) was that he’s going to Sirius radio. As told to me by a member, “it was interesting to hear Stern discussing how he had been walking around with his stomach in knots because he signed the contract a few days earlier – but wasn’t able to tell anyone about it because of “SEC rules.” Love how the SEC was able to do what the FCC couldn’t – keeping Stern quiet.
Sirius filed an 8-K announcing the news – oddly, they filed the 8-K under Item 8.01 (Other Events – which is akin to the former discretionary Item 5) rather than Item 1.01 (Material Agreements) even though they state that their “financial obligations under the agreement are material.” Stern is receiving $500 million over 5 years… maybe I am in the wrong business.
As loosely predicted in Monday’s blog, yesterday the FASB voted to delay implementing option expensing by 6 months – so now it will become effective for public companies with fiscal periods beginning after June 15, 2005. The effective date for non-public companies, proposed in the exposure draft to be a year after the date for public companies, remains to be determined. The FASB also agreed to allow for modified retrospective application going back to the beginning of the fiscal year for companies that wish to implement the rule early.
The FASB said that the principal reason for the delay was its awareness of companies struggling to implement internal controls under Section 404 – and the FASB also said it is still on track to issue its final statement by year’s end. If you need a crash course in what options expensing means for you – at next week’s NASPP Annual Conference, there will be 9 panels covering expensing.
SEC Proposes Reg M Amendments
At an open meeting held yesterday, the SEC proposed amendments to Regulation M that seek to create greater transparency in the syndicate book-building process and syndicate activity in the after-market, by prohibiting several practices that, in the view of the SEC’s staff, “artificially stimulate demand” for IPO stocks.
Most of the proposed changes will affect all distributions of securities, not just IPOs. The SEC is proposing to prohibit quid pro quo and tying agreements by prohibiting underwriters from conditioning an allocation of securities on the investor purchasing the distribution securities in the aftermarket, purchasing securities in another offering, or paying higher-than-usual commissions on other transactions – but the proposal is not intended to interfere with the underwriter’s freedom to allocate shares to its best customers and legitimate book-building.
More details are in the SEC’s press release on the topic – and in the firm memos that we have begun posting in Section A.16 of of our Sarbanes-Oxley Law Firm Memos.
Deferred Compensation Legislation Memos
We have been posting them in droves – see Section E.29 of our Sarbanes-Oxley Law Firm Memos.
Got a jolt yesterday when I read the lead article in the Washington Post Business section, during which a reporter interviewed SEC Chair Donaldson about executive pay. Not only did it include some interesting comments about the significance of the GE disclosure settlement and the upcoming Tyson Foods action, but it referred to our conference and dealt with a number of other topics that we have been talking about (eg. tally sheets, “holy cow” moments).
Clearly, there is some momentum for change as reflected by our 1000th registration yesterday – combined webcast and in-person attendance – for the October 20th compensation conference.
How to Disclose Material Weaknesses in Internal Controls
Last week, SEC Chief Accountant Donald Nicolaisen gave a speech during which he urged companies to disclose material weaknesses in a manner that enables investors to carefully evaluate the circumstances underlying the material weakness. He also noted he has met with investors and urged them not to treat all material weaknesses as equally significant and encouraged them to consider issuing timely guidance on what impact the following scenarios may have on their investment decisions:
– Management fails to complete the work necessary to issue its report on a timely basis.
– The auditor fails to complete the work necessary to issue its report on a timely basis.
– The work is completed and the reports are issued timely, but they identify one or more material weaknesses.
The Chief Accountant said he was encouraged to learn during a recent meeting with Moody’s that they are considering these issues and are tentatively considering grouping material weaknesses into different categories. One category, for example, might include a material weakness whose effects are limited to a single account balance that an auditor could address by expanding audit procedures. Other categories might include an ineffective control environment, such as the tone at the top, an ineffective audit committee or an ineffective financial reporting process. In these cases it may be more difficult for the auditor to audit around the problem. Moody’s tentatively does not expect to take any rating action for some categories of material weaknesses; whereas it may for other categories.
Parsing the New Deferred Compensation Legislation
Parsing the new tax legislation is no easy task – and as with all legislation, there are bound to be some surprises. Consider Section 402 which contains a new SEC reporting requirement to disclose penalities incurred by the the JOBS Act:
(e) PENALTY REPORTED TO SEC- In the case of a person–
(1) which is required to file periodic reports under section 13 or 15(d) of the Securities Exchange Act of 1934 or is required to be consolidated with another person for purposes of such reports, and
(2) which–
(A) is required to pay a penalty under this section with respect to a listed transaction,
(B) is required to pay a penalty under section 6662A with respect to any reportable transaction at a rate prescribed under section 6662A(c), or
(C) is required to pay a penalty under section 6662B with respect to any noneconomic substance transaction, the requirement to pay such penalty shall be disclosed in such reports filed by such person for such periods as the Secretary shall specify. Failure to make a disclosure in accordance with the preceding sentence shall be treated as a failure to which the penalty under subsection (b)(2) applies.
Yesterday, the Senate signed off on a massive $137 billion corporate tax overhaul that was passed by the House last Thursday. The legislation repeals the current tax regime that was ruled out of compliance by the World Trade Organization and replaces it with a system that brings the US into compliance – included in the legislation are some pretty dramatic nonqualified deferred compensation provisions that will require modification of virtually every nonqualified plan.
To be clear, this very significant legislation will require every employer in the US with a non-qualified retirement plan or a deferred compensation plan (which is virtually every employer, except small ones) to amend their plans, start a new plan or both.
Last week, I blogged about the Council of Institutional Investors’ updated executive compensation policy. One item I neglected to mention is that CII endorses the internal check method – which we recommended as one way to bring CEO compensation back in line – by stating “The committee should also ensure that the structure of pay at different levels (CEO and others in the oversight group, other executives and non-executive employees) is fair and appropriate in the context of broader company policies and goals and fully justified and explained.”
Also notable is that CII not only recommends disclosure of a company’s compensation philosophy – but believes that best practices includes shareowner approval of the compensation philosophy. I agree with the recommendation to disclose, but I think that shareholder approval goes a little too far.
Pay for Performance
In addition, CII recommends that compensation of the executive oversight group should be driven predominantly by performance. Of course, the devil is in the details in this area.
During last week’s House hearing on Fannie Mae, Rep. Baker introduced a chart detailing the compensation received by the top 20 executives and also noted that the company awarded nearly $250 million in bonuses – bonuses, not option windfalls! – over the past five years. According to a NY Times article from last Thursday, this “figure stunned even the company’s strongest supporters.”
– What responsible ways (and yardsticks) can be used to structure each component of top executives’ compensation, including cash compensation, bonuses, stock compensation, retirement plans, severance and more
– What types and levels of compensation are now appropriate for CEO pay – and how to identify them
– What should be the role of surveys regarding CEO pay; including how to overcome the problems of defining peer groups
– How to critically evaluate survey data and avoid the pitfalls of benchmarking – red flags and nuggets
– How to implement internal pay equity methodology
Is Chairman Donaldson a Short-Timer?
On Friday, I was in NYC to speak at IRRC’s annual proxy conference and didn’t think much of it when I heard SEC Commissioner Goldschmid give a speech on the 1st year anniversary of the shareholder access proposal railing against the Commission for not having adopted anything yet – because I already knew Goldschmid’s views and the fact that this proposal was still being debated behind closed doors on the 6th floor of the Commission as SEC Chairman Donaldson remains the swing vote.
So, I was a little surprised to read the Saturday NY Times that quoted Donaldson as stating that he was undecided if he would stay on if President Bush is re-elected – and there certainly were signs in the article that he might not stay for too long as Donaldson said that “he never sought the position” and “looked forward to other projects.” Perhaps Commissioner Goldschmid was pleading for action now as the future of this proposal could get quite murky once the November election passes.
Delay of Options Expensing?
In the same NY Times article, SEC Chair Donaldson also stated that he was considering a delay in the FASB’s option expensing proposal – even before he received a request to delay expensing from 51 US Senators last week (this request came in the form of 4 separate letters). The FASB meets this Wednesday to discuss the proposal’s status.
In July, the US House of Representatives voted overwhelmingly to stop the implementation of option expensing by passing a bill requiring instead that only a small portion of stock options – those given to a company’s top five executives – be expensed. This House-backed bill has been blocked in the Senate by Banking Committee Chair Richard Shelby – supporters are hoping to bypass his opposition by attaching the legislation as an amendment to a budget bill this week, but most action on the budget probably won’t happen until after the November elections.
Importance of Maintaining a Company-Wide Document Retention Policy
Yesterday, the PCAOB staff added three new FAQs on Auditing Standard No. 2 to the 26 FAQs that were issued in June. These FAQs are now in two separate PDFs on the PCAOB’s site.
In addition, the SEC’s Corp Fin updated its June FAQs on Section 404 management reports to clarify the answer to Question 3 to describe a Type 2 SAS 70 report and to address five new frequently asked questions (see Questions 19 through 23). The SEC’s changes were made to the June FAQs – so that all of their FAQs are in one document.
CII Updates Executive Compensation Policy
The Council of Institutional Investors has just updated its policy regarding executive compensation (the policy is not yet posted on their site) – and it includes many elements that we recommended in our 12 steps to responsible compensation practices (as written in the May-June and Sept-Oct issues of The Corporate Counsel). This is a significant development as CII doesn’t adopt or modify its policies without consensus among its 130 pension fund members (whose assets exceed $3 trillion).
The policy calls for quite a number of dramatic changes in compensation practices. Just in the disclosure area alone, consider these points to see how CII seeks to advance the ball well beyond what is required by S-K:
· Overview – Compensation committee is responsible for ensuring that all aspects of executive compensation are clearly, comprehensively and promptly disclosed, in plain English, in the proxy statement – regardless of whether such disclosure is required by current rules and regulations.
· Benchmarking – If benchmarking is used, disclose the peer group companies – and if the peer group is different from that used to compare overall performance, describe the differences between the groups and the rationale for choosing between them. Also disclose targets for each compensation element relative to the peer/benchmarking group and year-to-year changes in companies composing peer/benchmark groups.
· Salary – Disclose rationale for paying salaries above median of the peer group.
· Annual Incentive Compensation – Fully describe qualitative and quantitative performance measures and benchmarks used to determine annual incentive compensation, including the weightings of each measure. At the beginning of a period, disclose the maximum compensation payable if all performance-related targets are met – and at the end of the performance cycle, disclose actual targets and details on the determination of final payouts.
· Long-Term Incentive Compensation – Fully and clearly disclose a well-articulated philosophy and strategy for long-term incentive compensation – including size, distribution, vesting requirements, other performance criteria and grant timing of each type of long-term incentive award granted to the executive oversight group and how each component contributes to the company’s long-term performance objectives. Disclose whether and how long-term incentive compensation may be used to satisfy meaningful stock ownership requirements – and whether the committee imposes post-exercise holding periods or other requirements.
· Dilution – Disclose the philosophy regarding dilution including definitions of dilution, peer group comparisons and specific targets for annual awards and total potential dilution represented by equity compensation programs for the current year and expected for the subsequent four years – including a table detailing the overhang represented by unexercised options and shares available for award and a discussion of the impact of the awards on earnings per share.
· Stock Option Awards – Fully describe the qualitative/quantitative performance measures and benchmarks used and the weightings of each component – and whenever possible, include details of performance targets.
· Perquisites – Total perquisites should be described, disclosed and valued.
· Employment Contracts, Severance and Change-of-Control Payments – Fully and clearly describe the terms and conditions of employment contracts and other agreements/arrangements and reasons why the committee believes the agreements are in the best interests of shareowners – including tabular disclosure of the dollar value payable, including gross-ups and all related taxes payable by the company under each scenario covered by the contracts/agreements/arrangements.
· Retirement Arrangements – Disclose the terms of any deferred compensation, retirement, SERP or other similar plans, along with a description of any additional perquisites or benefits payable to executives after retirement – including a single table that details the expected dollar value payable to each executive under any deferred compensation, retirement, SERP or similar plan, along with a dollar value of any additional perquisites of benefits payable after retirement.
· Stock Ownership – Disclose stock ownership requirements and whether any members of the executive oversight group are not in compliance.
But the real bonus was having Jack Krol – former Dupont CEO/Chair, who sits on a number of boards today – come in for a brief videotaped session. Jack urgently wanted to participate live on the panel “What Compensation Committees Should Be Doing Now” to urge others to consider the novel methodology implemented under his watch at Dupont – but he has a date conflict.
As we outlined in the Sept-Oct issue of The Corporate Counsel, one corrective approach to rolling back excessive pay is the “the internal check” – checking for “internal pay equity” at various levels within a company to ensure that the CEO’s compensation has not gotten out of line within the company. So now those of you that have registered for the conference – in person or by webcast – will be able to hear Jack explain how he accomplished this at Dupont as part of the panel for which he originally was slotted!
Is CEO Pay Really Changing?
Read this interesting interview with Josh Lurie on Whether CEO Pay Is Really Changing to read the interesting results of a CEO pay survey of 2400 companies over a three-year period.
8-K Webcast Transcript Coming Soon
Due to its length, it has taken the September 23rd panel a little longer than usual to clean up the webcast transcript – it will be up soon. Sorry for the delay! The audio archive is available now.
In probably his most significant speech to date, Enforcement Director Steve Cutler gave this riveting speech about gatekeeper responsibilities at UCLA a few weeks back. The speech is entitled “The Themes of Sarbanes-Oxley as Reflected in the Commission’s Enforcement Program.” The three themes identified were: fundamental significance of gatekeepers in maintaining fair and honest markets; importance of maintaining integrity in the investigative process aimed at ferreting out securities law violations; and need for greater personal accountability and deterrence at the top of the corporate world.
Here are some notable snippets that might be close to home for the lawyers out there:
– we named lawyers as respondents or defendants in more than 30 of our enforcement actions in the past two years
– close to half the Commission’s actions against lawyers during the past two years involved outside counsel
– we are also considering actions against lawyers, both in-house and outside counsel, who assisted their companies or clients in covering up evidence of fraud, or prepared, or signed off on, misleading disclosures regarding the company’s condition
– one area of particular focus for us is the role of lawyers in internal investigations of their clients or companies, as we are concerned that, in some instances, lawyers may have conducted investigations in such a manner as to help hide ongoing fraud, or may have taken actions to actively obstruct such investigations
– but what we want to do is focus their [gatekeepers’] minds, to have them think, when they wake up in the morning, if I fail to live up to my legal and fiduciary obligations, if I don’t hold the line with my corporate client and resist pressure to acquiesce in wrongdoing, the consequences will be swift and severe.
