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.
Without much fanfare, the SEC Enforcement Division recently brought what could be considered the first “up-the-ladder” case, a settlement with John Isselmann.
As proof that Enforcement Director Steve Cutler was serious in his recent gatekeeper speech that the SEC is setting a high bar for attorneys that represent public companies – and expects to be bringing more actions against lawyers – this case was brought against a general counsel, even though he was the one that blew the whistle against wrongdoing within the company! However, the Staff believed he didn’t blow it soon enough.
Also notable is that the conduct in question occurred in December 2002 – before Part 205 was adopted – so it is a more traditional “causing” violation and not really a true “reporting up” case. This is important because it shows that – with respect in-house counsel who have a direct role in preparing and approving public statements and filings – that the SEC believes that the pre-SOX securities laws have the practical effect of requiring “reporting up.” (I imagine that when – and if – the SEC sues an associate at a company’s outside law firm under Part 205, there’ll be some commotion!)
The bottom line is that this case indicates that the SEC is prepared to seek additional penalties against counsel who do not promptly notify the audit committee upon learning that their client is about to violate the federal securities laws. Thanks to Ken Winer and Tom Kuczajda for the heads-up!
Dilbert Enters Into Excessive Compensation Fray!
During the past few days, Scott Adams has challenged excessive compensation practices through his famous Dilbert comic strips. Here are two from the weekend:
A few weeks back, I blogged about several states that had amended their laws to allow for electronic-only shareholder meetings. Now, California has changed its laws to be more e-communications friendly. Join Keith Bishop, a former California Commissioner of Corporations, who dissects this development in this interview on Taking Care of Business Using Electronic Communications in California.
Filing Fees – It’s That Time of Year Again…
Yesterday, the SEC released Fee Advisory #3 stating that the SEC will operate under a continuing resolution that will extend through November 20th – meaning filing fees remain at their current rates until that time (and at that time, there likely will be another extension). Today is the first day of the SEC’s fiscal year – and it has become an annual tradition for Congress to drag their feet passing the federal budget, which forces the SEC to issue multiple fee advisories to reflect its “continuing resolution” status.
Five days from whenever Congress passes the budget, the SEC will lower registration fees from the current rate of $126.70 per million to $117.70 per million, a 7% decrease. We have experienced lower rates each year for quite a while now.
Yesterday, we posted a practice pointer on CompensationStandards.com from Paul Hodgson of The Corporate Library about a company which has paid a total of $500 million to three separate CEOs over the past decade. Yes, this is an extreme (and our October 20th conference is not about extremes – it is about practical guidance for all the situations that are not extreme) – but it is quite a shocker and makes for interesting reading.
Most importantly – particularly considering the SEC’s interest in this area recently (ie. likely to be more GE-like SEC Enforcement disclosure actions) – Paul notes this amount includes a $21 payment related to the huge $111 million “golden hello” that he previously had not been aware of – the $21 million was paid to a GE subsidiary to buy Wendt out of his confidentiality agreement and it had not been disclosed in the company’s proxy statement or in the filed employment contract. But Paul did manage to dig out a tiny paragraph disclosing the amount in a massive pre-bankruptcy Form 10-K.
NYSE Proposes Procedures for SEC Filing Deficiencies
Yesterday, the SEC proposed an amendment by the NYSE that would codify existing procedures followed by companies that fail to timely file their annual reports with the SEC (i.e. 10-Ks, 20-Ks, etc.; doesn’t apply to the glossy annual reports). According to the proposal, once a company has been notified by the NYSE that it is late:
– Within 5 days of receipt of this notification, the company would be
required to (a) contact the NYSE to discuss the status of the annual
report filing, and (b) if it has not already done so, issue a press
release disclosing the status of the filing.
– If the company fails to issue this press release in a timely manner, the NYSE would itself issue a press release stating that the company has failed to timely file its annual report with the SEC.
– During the 9-month period from the filing due date, the NYSE would monitor the company and the status of the filing, including through contact with the company, until the annual report is filed.
– If the company fails to file the annual report within 9 months from the filing due date, the NYSE would be permitted, in its sole discretion, to allow the company’s securities to be traded for up to an additional 3-month trading period depending on the company’s specific circumstances.
– If the NYSE determines that an additional trading period of up to 3 months is not appropriate, suspension and delisting procedures would commence.
A member emailed me to share the NYSE’s interpretation of Section 303A.07(c)regarding the requirement that the audit committee discuss the annual/quarterly financial statements and MD&A. The comment period for the NYSE’s proposed amendments ends today.
The member asked the NYSE Staff to clarify a concern regarding the proposed change to Section 303A.07(c)(iii)(B) that inserts the phrase “meet to review and” before the current requirement “to discuss” – because he was worried that the audit committee will now be required to “meet” to review specific MD&A disclosures.
In response, the NYSE Staff stated that it interprets the existing standards – not the proposed standards! – to require audit committees to review a “relatively advanced” draft of MD&A at a meeting. These meetings can be held telephonically. This interpretation comes despite the fact that it is probably not readily apparent that the NYSE had always contemplated that audit committees would be holding meetings to review specific MD&A disclosures under Section 303A.07.
As you know, many companies schedule committee meetings (including audit committee meetings) around the regular board meeting schedule. Some companies have board meeting schedules that don’t coincide conveniently with the earnings press release and the Form 10-Q/K filing schedules. Such companies typically schedule two meetings of the audit committee each quarter: one to address the earnings release (including the financial statements) and another to review the Form 10-K/Q drafts. These meetings often are held telephonically.
During their second meeting, audit committees will discuss disclosures to be made under MD&A, but are unlikely to have a draft of the complete Form 10-K/Q filing – including MD&A – available at that meeting because it isn’t ready yet. In such instances, the practice is to discuss disclosures under MD&A generally and instruct management to circulate a draft to committee members as soon as possible. Committee members then are given an opportunity to comment on the draft and discuss it with management, but an additional meeting is not held. Apparently, those days are over and audit committees might have to hold a third meeting to review a “relatively advanced” draft of MD&A – or a more likely solution, push back the second meeting until the MD&A is sufficiently specific.
SEC Issues SAB 106 for Oil & Gas Companies
Yesterday, the SEC issued SAB 106 to express the Staff’s views regarding the application of FASB Statement 143, Accounting for Asset Retirement Obligations, by oil and gas producing companies following the full cost accounting method.
The Coming Non-Qualified Deferred Compensation Legislation
Today is the NASPP webcast – The Coming Non-Qualified Deferred Compensation Legislation – featuring Bill Sweetnam of the U.S. Treasury Department and Max Schwartz of Sullivan & Cromwell, who will explain how this legislation is still very much alive – and the dramatic impact it will have on equity compensation!
Last May, a panel of the Ninth U.S. Circuit Court of Appeals in San Francisco voted 2-1 to reject the SEC’s argument that $37.6 million in termination pay and bonuses to two top officials of Gemstar TV Guide International were extraordinary payments that must be frozen while the executives were under suspicion of cooking the company’s books. This was the SEC’s first attempt to use new Section 1103 of Sarbanes-Oxley to freeze termination payments that it felt was extraordinary.
On Friday, a majority of its 25 judges voted to grant the SEC’s request for a rehearing before an 11-judge panel. No date has yet been set for the rehearing.
The big battle is over what is deemed an “extraordinary payment” – something that some of our Executive Compensation Task Force members have addressed through their practice pointers on CompensationStandards.com.
– 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
The Future is Here – SEC Proposes Voluntary Use of XBRL
Yesterday, the SEC posted both a concept release and a proposing release regarding the voluntary tagging of EDGAR data to make the data more “fungible.” Fungible is probably the best way to describe XBRL – because it is derived from eXtensible Mark-up Language (known as “XML”), a coding language that allows for the creation of individual “tags” for specific elements in structured documents.
Using XBRL, each item in a financial statement is individually tagged based on a “taxonomy,” or agreed-upon system of classification. With the tags working behind the scenes, companies can create financial statements that investors can easily manipulate. In other words, investors will be able to more easily compare “apples” to “apples” when comparing the financials of different companies.
Even before this voluntary program – that the SEC hopes to launch early next year – Microsoft, Morgan Stanley and Reuters have made their financials available in XBRL. Here are some FAQs that I drafted about XBRL back on my old site.
