Due to our strong beliefs in the message contained in the just-published May/June issue of The Corporate Counsel, we have decided to post a free, electronic version of it on our new website, CompensationStandardsConference.com – complete with links that will take you directly to a wealth of important supporting materials, such as responsible practice pointers that have been submitted by members of our Task Force. This special issue provides a roadmap for compensation committee, laying out a 12-Step Program for responsible compensation practices.
Our Executive Compensation Task Force consists of over 80 of the top compensation lawyers and consultants – and these practice pointers have just started to roll in and many more will be posted in the coming days leading up to the Major 10/20 Compensation Conference, which is co-sponsored by the NASPP, The Corporate Counsel and The Corporate Executive.
Although the issue is posted in the publicly accessible section of CompensationStandardsConference.com – note that many of the links are to materials and memos that can only be accessed by those that sign up for the October 20 Major Compensation Conference – you can register to attend the live conference in San Francisco or you can register for webcast access to the conference. Either type of attendance will entitle you to access all of the “one-stop” resources on CompensationStandardsConference.com. (And we have special rates for those that are NASPP members or those at a firm/company that register more than one person).
You should note that in drafting this issue of The Corporate Counsel, some of our colleagues reviewed early drafts and thought that the standards we espouse are too high (but they all believed that the message still needed to be made). After careful consideration, we decided to stand by these standards – as we believe that high standards are absolutely necessary in the wake of so many past compensation excesses.(And early reactions to the issue support our decisions – one esteemed colleague called it our most crucial issue in 30 years.)
Part of our reasoning is that without high standards, Congress and regulators will implement standards that make ours look weak – just look at the non-qualified deferred compensation legislation that has already been passed by the House and the Senate (it would impose stringent standards on deferred comp arrangements that would result in ALL deferrals being immediately taxed and penalized if a single violation within the plan occurred). Note that this legislation is being extensively covered on both CompensationStandardsConference.com and Naspp.com.
SEC Proposes Section 16(b) Rulemaking
Yesterday, the SEC proposed amendments to Rules 16b-3 and 16b-7 to address the Third Circuit opinion in Levy v. Sterling Holding Company, LLC (Cert. denied by the Supreme Court). The SEC also proposed to amend Item 405 of Regulations S-K and S-B to harmonize it with recent changes in the Section 16 area (ie. shorter Form 4 due date, mandated electronic filing and web site posting of Section 16 reports).
Alan Dye will blog more about this important development in his Section16.net Blog.
We have wrapped up our survey on blackout and window period practices, with a healthy response of 159. Three-quarters have not changed their periods, while 15% expanded them and 8% reduced them. 10% intend to change their periods soon, while 21% are mulling it over (and 20% did it recently) – and 50% are comfortable with what they have. There also are stats on what types of blackout and window periods are currently being used – so check out the results!
New Survey on Disclosure Committees!
With “real-time” disclosure bearing down on us, I expect many companies will be rethinking the composition of their disclosure commmittees – answer 4 simple questions in our new survey on disclosure committees and we shall see if I am right or wrong…
Google Revises S-1 Again
I don’t know why but I get a chuckle out of today’s mainstream business press that theorizes on what type of Corp Fin comments led to Google filing an Amendment No. 2 to S-1, where it revised its risk factors and moved the founders’ letter (regarding why its business is so unique) to the middle of the prospectus. My favorite risk factor essentially states retail investors don’t know what they are doing and will be buying a majority of the shares issued in this IPO, so the stock price might tank afterwards…
Chairman Donaldson Speaks
Last week, SEC Chairman Donaldson gave a speech at the Directors College at Stanford Law School, where he spoke about various Commission initiatives and accomplishments, including the controversy over the shareholder access proposal.
Late last week, the SEC issued a release that approved PCAOB Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements.
In a related press release, the SEC said that guidance would be forthcoming from both the SEC and PCAOB staffs. The new Auditing Standard is effective for audits of fiscal years ending on or after Nov. 15, 2004 for accelerated filers – or July 15, 2005 for other companies.
SEC Chief Accountant Blunt on Contingency Fees
Last week, SEC Chief Accountant Donald Nicolaisen held a private meeting with the 7 largest auditors to reinforce the SEC’s position that accepting contingency fees for doing tax work for the companies they audit is not allowed – and he requested that the firms disclose any arrangements that may violate the rules to the client’s audit committee.
Bloomberg also reported that Nicolaisen even told the firms they may face SEC enforcement investigations if they accept contingency fees from companies they also audit.
Governance for the Family-Owned Business
Family-owned businesses pose unique governance issues, as reflected in this interview with Jack Moore on Governance in a Family Business.
I blogged on June 1st about NYSE’s new forms of 303A affirmations. In case you file the unrevised form by accident, I have heard that the NYSE staff’s position is that you do not need to re-file the 303A affirmations using the newest version of the form (as the revisions made no significant changes to the affirmation forms). Of course, this applies assuming you filed the 2nd generation version of 303A affirmations, as opposed to the old 1st generation affirmations that were not applicable at all for this year.
Withhold Votes Continue
Although a few weeks old, I would be remiss if I didn’t note how Federated Department Stores registered the highest withhold vote levels for this proxy season. More than 61% of the votes cast were withheld from 4 directors at Federated’s May 21 annual meeting. A noteworthy aspect of this record level is that there was no organized “vote-no” campaign.
The following excerpt from Stephen Deane of ISS analylzes why this happened: “So why the record number of withhold votes at Federated? True, the company has repeatedly ignored majority votes on shareholder resolutions calling for annual elections. But that hardly makes Federated unique.
Instead, the share ownership structure–which overwhelmingly comprises institutional investors–may well hold the key to understanding the vote results. According to one source who asked not to be identified, institutional investors own nearly 95 percent of Federated’s shares, and the company’s top 10 institutional investors alone hold 43 percent of the shares. And those institutional investors are precisely the ones most likely to withhold votes from directors who ignore majority votes.”
Yesterday, the House Financial Services Committee approved – by 45-13 – a bill that would restrict any FASB option expensing standard to options granted to a company’s top five officers. The bill would also delay implementing any standard for a year, until completion of a study. The legislation is HR 3574, that was passed by the subcommittee in mid-May. This comes on the heels of the Financial Accounting Foundation issuing a statement opposing all legislative proposals desinged to curb FASB independence.
Although there still is a lot of lobbying activity on the Hill and this bill might get traction in the House, it doesn’t appear that the Senate would go along with it. At this point, expensing is still a sound bet for next year.
SEC Addresses Proxy Advice Conflicts
In late May, the SEC’s Division of Investment Management issued a no-action response that said mutual funds should be aware of potential conflicts of interest on the part of proxy-voting companies that provide advice on how to vote at annual meetings. The no-action response requires mutual funds to know who the advisers’ clients are and how much they are being paid.
On its face, it appears that this position by IM could impact ISS – but ISS has posted a statement explaining how the SEC’s guidance buttresses its position that the fact that a proxy advice firm provides services and receives compensation from issuers doesn’t – by itself – impact the firm’s independence.
Another Virtual Shareholders Meeting
It’s been quite a few years since the last company held its annual shareholders meeting solely online – but ICU Medical did just that a few weeks ago, as described in its proxy statement.
Even though Delaware law has permitted electronic only meetings since 2000 – and Inforte was the first (and only, until ICU) company to do so right after Delaware changed its law – Delaware companies have been loath to go that route due to fear of shareholder wrath. Last year, Seibel Systems backed off plans to conduct an e-only meeting after shareholders saw the proxy materials filed by Seibel and complained.
Learn more about electronic only meetings from some FAQs that I wrote a while back on my old site.
We have posted the transcript from our popular webcast, “The Latest on Evolving 10b5-1 Plan Practices.”
Nasdaq’s Two New FAQs
The Nasdaq has issued two new FAQs regarding continuing waivers of codes of conduct as follows:
1. Is disclosure required of a waiver to the Code of Conduct granted to an officer or director before the May 4, 2004 effective date for Marketplace Rule 4350(n)?
If the pre-existing waiver relates to a matter concluded before May 4, 2004, then disclosure is not required. If the waiver relates to a matter not concluded by such date or to an ongoing matter without a specific end-date, then disclosure is required, notwithstanding the fact that the waiver was granted prior to the effective date of the Rule. In view of the potential for company confusion as to the applicability of the disclosure requirement to pre-existing waivers, companies will be afforded up to June 15, 2004 to disclose waivers to officers and directors that preceded May 4, 2004.
2. What disclosure is required for a waiver to the Code of Conduct for an officer or director that extends beyond one year?
For ongoing matters or matters extending beyond one year, disclosure is required at least annually.
More on Shareholders’ Agreements
Here is this month’s installment of Carl’s Corner features more commentary by Carl Schneider on Shareholders’ Agreements.
As noted in this press release, the Service Employees International Union is appealing Corp Fin’s exclusion of a shareholder proposal to the full Commission. The precatory proposal urged Crescent Real Estate Equities’s board to implement a comprehensive policy governing related party transactions between Crescent and any officer or director, which would require annual disclosure in a separate report to shareholders. Corp Fin had excluded the proposal as ordinary business under Rule 14a-8(i)(7).
Impact of Friday Holiday on Tender Offers?
A reader asked if the Presidential declaration of an unscheduled federal holiday is not a business day for purposes of the 20 business day period that tender offers must remain open, like Friday’s memorial day for President Reagan. [In addition to the memorial day for President Reagan, the day before or after Christmas is sometimes declared to be a federal holiday by a Presidential executive order.]
It is my understanding that the SEC staff takes the position that if the offer is ongoing, you can still count the unscheduled Friday holiday in the 20 days. But you shouldn’t have ended the offer or started it on Friday.
One of the more fascinating stories of the year is Google’s decision to forego traditional distribution methods for its IPO and utilize a Dutch Auction process instead. Learn more about Dutch Auctions from my interview with Maria Gabriela Bianchini on Google’s Dutch Auction.
PCAOB Adopts Document Retention and Non-US Review Standards
At yesterday’s meeting, the PCAOB adopted Auditing Standard No. 3 that require auditors to retain their records for seven years – and in sufficient detail so that an experienced auditor with no previous connection to the engagement could read them and understand clearly what work had been performed, who performed the work and why the auditor reached its conclusions.
In addition, the PCAOB adopted rules that call for the PCAOB to take into account the rigor and independence of non-US oversight groups when deciding how to review the work of non-US accountants who have audit clients with stock trading in U.S. markets. To date, 103 foreign audit firms in 42 countries have registered with the PCAOB, with nearly 250 more in the pipeline.
Executive Compensation Trends
You will soon be getting an earful from us on executive compensation in the next issue of The Corporate Counsel. But if you can’t wait, I suggest you check out this IOMA webinar being held next Tuesday featuring Dick Wagner, an experienced compensation consultant who isn’t afraid to speak his mind.
Dick just joined an executive compensation task force that I have been helping set up in connection with our October 20th major compensation conference. More about that later…
It looks like Corp Fin’s position on 302 certifications for amended filings has evolved a bit. Now, if an amended filing contains an amendment to the Reg. S-K Item 307 & 308 disclosure about the company’s evaluation of disclosure controls and procedures and internal controls for financial reporting (and accordingly, the paragraph 4 certifications regarding controls and procedures are made), the CEO/CFO must also make the paragraph 5 certifications. In other words, paragraphs 4 and 5 go together when it comes to amended filings.
Yesterday, the SEC instituted two separate public administrative proceedings against 31 companies to determine whether to revoke the registration of their securities under the ’34 Act (the SEC also temporarily suspended trading in the securities of 26 of these companies).
This really is not newsworthy, except that it’s the first time that the SEC has brought this type of action. Even though the SEC appropriately is going after these shell companies to prevent market manipulation, I couldn’t help but think how this will help reduce Corp Fin’s review burden under Section 408 of Sarbanes-Oxley (i.e. each ’34 Act filer must be reviewed once every 3 years), even though 31 companies is merely a drop in the bucket…
Yesterday, Korn/Ferry International filed an 8-K reporting that it has been advised that the SEC staff is conducting an informal inquiry into independence issues arising out of payments made by Ernst & Young, the company’s auditors, to a company affiliated with a former director of the company for marketing services.
The Wall Street Journal reports today that Best Buy and TeleTech Holdings also are subject to the same SEC inquiry, as the same consultant sits on their boards and also use E&Y as their auditor (but these two companies have not yet filed a 8-K regarding the investigation). The WSJ points out the major difference between this inquiry and the recent PeopleSoft one (which led to E&Y being barred from obtaining new public clients for 6 months) – this new investigation involves only $377,000 for the director’s marketing consulting; the PeopleSoft matter involved $500 million.
Apparently the provision on auditor independence that the Staff is looking at is Rule 2-01(c)(3) of Regulation S-X. Rule 2-01(c) sets forth a non-exclusive specification of circumstances inconsistent with auditor independence:
“3. Business relationships. An accountant is not independent if, at any point during the audit and professional engagement period, the accounting firm or any covered person in the firm has any direct or material indirect business relationship with an audit client, or with persons associated with the audit client in a decision-making capacity, such as an audit client’s officers, directors, or substantial stockholders. The relationships described in this paragraph do not include a relationship in which the accounting firm or covered person in the firm provides professional services to an audit client or is a consumer in the ordinary course of business.”
According to the 8-K, E&Y conducted an internal review and confirmed its independence to Korn/Ferry – and based on that confirmation and its current knowledge, Korn/Ferry believes that E&Y’s independence was not impaired. Thanks to eagle eye Mike Holliday for helping out on this one!
Disclosure about SalesForce.com’s IPO Cooling Off Period
On May 25th, I blogged about how SalesForce.com’s IPO was delayed due to gun-jumping concerns. The company has filed an amended S-1 with a risk factor related to this potential gun-jumping and we have added it to our laundry list of “Risk Factors Regarding Gun-Jumping” in our “Disclosure Samples & Analysis” Practice Area. So far, the cooling off period appears to be nearly 4 weeks and counting…but some of this period might be attributed to the company’s own timetable for going to market.
No EDGAR on Friday
Out of respect for President Reagan, the SEC will be closed this Friday – and EDGAR will not be accepting filings.
