Today, at an open Commission meeting, the SEC adopted the proposed rules on disclosures regarding nominating committee functions and communications between security holders and boards of directors. During the meeting, Commissioner Goldschmid pushed Corp Fin Director Alan Beller pretty hard about finalizing the rules on shareholder access as soon as possible (for which the comment period does not end until late December). Goldschmid asked about possibly getting it out in February and Beller did not commit.
On the new rules, the SEC has issued a press release – but not an adopting release yet. Below are notes from Mike Holliday on today’s meeting (note how the SEC was responsive to a number of the points made in the comments):
1. A required disclosure was added to provide the company’s policy, if it has one, on director attendance at annual meetings, and a statement of the number of directors attending the prior year’s annual meeting.
2. A requirement was added to require disclosure of changes in nominating committee procedures in periodic reports.
3. Instead of describing the material terms of a nominating committee charter, the registrant is required to make the charter available by posting on its website and disclosing in the proxy statement where the charter is located, or the charter can be attached to the proxy statement every three years.
4. While disclosure of qualifications for board membership is required, disclosure of specific standards for the overall structure and composition of the board will not be required.
5. The name of the source of each nominee (other than nominees who are executive officers or directors standing for re-election) will not have to be disclosed. Instead, the registant will disclose the source by category of source (security holder, non-management director, CEO, other executive officer, third party search firm, or other specified source).
6. The 3% beneficial ownership trigger to require additional information where the committee does not nominate a candidate recommend by a security holder is increased to more than 5%.
7. The requirement to disclose the specific reasons for the nominating committee’s determination not to nominate a recommended candidate in certain circumstances is eliminated.
8. The name of the recommended nominee will be required to be disclosed in addition to the name of the nominating shareholder(s) where the committee determines not to nominate a candidate recommended by a more than 5% shareholder(s), but written consent to the disclosure must be given by the recommended nominee and the nominating shareholder(s).
9. The requirement to disclose material actions taken as a result of shareholder communications is eliminated.
Effective Date of New Rules – September 30th Companies Beware!
Mike Holliday points out that these new rules may be particularly burdensome to companies with September 30th fiscal year ends. The SEC’s press release states that the rules will apply to proxy statements first sent or given to security holders on or after the date that is 30 days after publication in the federal register. This could pick up September 30 companies who may be preparing and printing their proxy statements soon for their upcoming annual meetings. The effective date does not allow much lead time to plan and take timely corporate action (not to mention draft, review, print, stuff in envelopes, etc.). The following is the SEC’s paragraph on effectiveness:
“The rules adopted today are expected to be available on the Commission’s website within the next few days and will apply to proxy and information statements first sent or given to security holders on or after the date that is 30 days after their publication in the Federal Register.”
When John Newell of Goodwin Procter sent me his excellent checklist of what disclosures are now required under the SRO standards (this checklist is in our “Proxy Season Resource Center” with other law firm checklists) – he provided the following interesting observations:
“The NYSE has advised listed companies that the new disclosures will not be required in documents before the date on which the company must comply with the amended NYSE listing standards — for calendar year companies, their first annual meeting after January 15, 2004.
Nasdaq has informally advised that companies should include the Nasdaq proxy statement disclosure in proxy statements sent to stockholders for annual meetings held on or after January 15th. It is possible that there will be further clarification on these positions in coming weeks. However, companies may want to consider including these disclosures, whether or not the SROs require them to do so, for the following reasons:
1. Many companies have significant institutional holders who may be looking for information about companies’ compliance with the new corporate governance requirements. Being proactive about corporate governance is a good investor relations strategy. Many companies have been early-adopters on corporate governance matters during the past 15 months, and they may take the same view on the new SRO disclosure requirements.
2. We do not know what the various proxy advice services (i.e. ISS and Glass Lewis – as well as the governance rating services) will do with proxy disclosure that doesn’t clearly indicate that the company will be in compliance with SRO requirements if management’s nominees are elected. Will they down-rate the company? This seems very plausible…I do not see them giving everyone a pass for this spring just because of a quirk in the effective dates. That’s just a guess.
3. The NYSE and Nasdaq will likely be reviewing this spring’s proxy statements to determine whether companies were in compliance as of their annual meeting dates. If the proxy statement indicates that the company will be in compliance on the date of its annual meeting, it may be better to include at least the required disclosure about directors and committees and avoid inquiries by SRO staff later.
4. Including the disclosure that would be required about directors, and to a lesser extent other corporate governance matters involving directors, may avoid later questions about whether the proxy materials omitted material information.
For example, in the case of a Nasdaq company that knows that it is likely that a non-independent director will be appointed to one of the three key committees under the “exceptional and limited circumstances” exception, it may be better to disclose that fact and avoid potential claims that stockholders would not have voted for this director if the company had disclosed that it knew that the board intended to appoint him/her to the audit committee but omitted disclosing this in the proxy statement.
My advice is, to the extent the company can determine the facts, to comply with the NYSE or Nasdaq disclosure requirements (in proxy statements and 10-Ks) to the greatest extent possible – and to make sure that website disclosure is up at least by the annual meeting for NYSE companies.”
SEC’s New Office of Risk Assessment
Yesterday, SEC Chair Donaldson announced that the SEC is on the verge of establishing a new Risk Assessment Office, which reportedly is “a cornerstone of efforts to counter criticism that it is not acting quickly enough to protect investors.”
The office will have a director and five staff and gather data on trends and risks to identify new areas of concern. Separately, each SEC Division will have its own risk assessment staff. The SEC’s Division directors and heads will sit on a Risk Management Committee. I just fail to see how this office would do much more than add another layer of red tape (unless they got Barnaby Jones to head it up).
Chairman Donaldson faced tough questions yesterday while testifying before the Senate Committee on Banking, Housing and Urban Affairs regarding mutual funds and this office appears to be one of his ways to correct the perception that Eliot Spitzer is running circles around him.
Legislative Update Webinar
On December 3rd, Akin Gump is offering a free webinar – “The Continuing Political Debate Over Corporate Governance — Where Will It Lead?” – during which Hank Terhune, Dave Carlin, and Charlie Johnson will review corporate governance issues that surfaced during the first session of the 108th Congress and a forecast of future activities, including an assessment of how governance will play a role in next year’s elections.
For today’s “Internal Controls” webcast at 4 pm eastern time, download the Powerpoint from John Huber and Teri Iannaconi now. Download it as a PDF, if you don’t have the Powerpoint “viewer” that enables web downloads of powerpoint presentations.
Growing Interest in Director Education
Probably bolstered by the new NYSE standard on corporate governance guidelines (that requires director education to be addressed), I have been getting numerous questions on director education. As a result, we have commenced a Quick Survey on Director Education and Orientation on TheCorporateCounsel.net – please take a moment to share your experiences.
Here’s a coupla thoughts on directors colleges – we have a list of links to all of them on GreatGovernance.com by the way – many directors believe internal programs can be more useful since discussion among similarly situated directors can occur, management can participate and topics can be tailored to the company’s circumstances (and it can save travel time and expenses).
Some companies also are exploring the use of reading material, multiple shorter programs at various times during the year by in-house or outside speakers, a long session or retreat devoted to a topic, or some combination of all.
Sharing Privileged Information with Buyers Without Waiving Privilege
In an interview with Brette Simon of Sheppard, Mullin, this dilemma is explored.
As Brette explains on one hand, it is incumbent on you – as the seller – to disclose to the buyer all material information relating to the business it is purchasing. On the other hand, should you share this confidential information with the potential buyer, you jeopardize waiving the attorney-client privilege with respect to the particular information, and, potentially, any other privileged information relating to the same subject matter.
This means that if litigation is pending – or is later filed against you – by a third party claimant (other than the buyer) regarding the problem, and the opposing party requests this confidential information, you will be unable to assert that it is privileged, and you will have to provide potentially damaging information to the claimant.
We have three important webcasts coming up to end the year – first is the one tommorrow with John Huber of Latham & Watkins and Teri Iannaconi of KPMG on the practical implications of internal controls and all the other procedures that companies must put in place now (you can download the PowerPoint for this program now if you wish).
The other two webcasts are “back-to-back” in early December – Ron Mueller of Gibson Dunn, Karl Groskaufmanis of Fried Frank and Stacey Geer of BellSouth dissect new due diligence and drafting practices behind “The New MD&A” on December 10th.
Last – but not least – on December 11, we have a very practical examination of how companies are actually responding to the new SRO governance requirements. This will not be a recital of what are the new rules (the reason why I did not ask NYSE/Nasdaq reps to join the panel).
Rather, this will be inhouse lawyers explaining what their companies have actually done and why. This program – “The New Governance Listing Standards” – includes inhouse experts from both NYSE and Nasdaq companies. This webcast will ooze with practice pointers.
If you are not a subscriber, you can gain access to all three of these webcasts for free if you enter into a “no-risk” trial for 2004 (“no-risk” meaning you can obtain a refund at any time during ’04 – no questions asked). For those of you in law firms, check out the advantages of our new “firmwide” license.
Q&A with Alan Beller
Arguably the best part of the PLI Securities Law Institute is when the Director of the Division of Corporation Finance answers questions during a brown bag lunch on the second day of the conference.
During this session this year, Director Alan Beller answered 17 questions – members of TheCorporateCounsel can read notes with those questions and answers in our notes from “Lunch with Alan Beller.”
The IT Industry Gets to Work on Internal Controls
CFO.com just posted an interesting article on how the IT industry is looking to help companies reach compliance with the new internal controls requirements.
On Tuesday, the FASB took action on the proposed new disclosures for pension plans and other postretirement benefit plans, including a Project Update dated November 12. These are reported as tenative decisions until the final Statement, which the FASB staff was directed to draft, is issued.
The FASB’s changes will be effective for fiscal years ending after December 15, 2003, with a few exceptions. The FASB decided to defer – until fiscal years ending after June 15, 2004 – the new disclosures on the projected value of all benefit payments and any new disclosures not previously required regarding foreign plans. The FASB has not yet decided on the effective date for new disclosures about plan assets.
FYI, on AccountingDisclosure.com, we have a section devoted to pension plan disclosure.
Does Governance Impact Corporate Performance? (or “Do Bankers Really Care?”)
This is one of those $64 questions – read my interview with Marc Zenner, formerly a banker with Citigroup to glean some insight into “Investment Banking and Corporate Governance.”
SEC to Adopt Nominating Committee Disclosure Requirements
Next Wednesday, the SEC will hold an open Commission meeting at 2 pm to consider the outstanding proposal regarding disclosure of shareholder communications and nominating committee activities.
All indications are that the SEC intends to apply these new requirements to the upcoming proxy season – see the Eleven Actions You Should Consider Now regarding this proposal in our “Shareholder Access” Portal.
Last week’s PLI conference had quite a few panels about “reporting up” – including a speech by SEC Chair Donaldson – but the SEC did not tip its hat regarding whether its outstanding “noisy withdrawal” proposal will be adopted.
For TheCorporateCounsel.net subscribers, we have posted notes from one of the panels from the PLI Pre-Conference on attorney responsibility standards – the panel that included Jack Bostelman, Stan Keller, SEC staffer Richard Humes and others.
Results from the Microsoft Annual Meeting
At Tuesday’s annual meeting, Microsoft shareholders approved a proposal to let employees be paid with restricted stock units instead of options – a plan that was opposed by CalPERS. CalPERS voted against the proposal because Microsoft didn’t say what percentage of stock grants would carry performance criteria and because those criteria aren’t strong enough. Calpers owns 55.7 million shares of Microsoft stock.
A number of investor groups have expressed displeasure over the fact that Microsoft did not put its underwater exchange option arrangement with JP Morgan on the ballot.
Also noteworthy, former Microsoft president and board member Jon Shirley was removed from the company’s audit committee after complaints from CalPERS and the Ohio Public Employees Retirement System (the funds said a former employee shouldn’t sit on the committee).
It is with great sadness that I tell you that Linda Quinn passed away yesterday. Linda was the Director of the Division of Corporation Finance when I first joined the SEC back in the late ’80s and not only was one of the finest lawyers around, she was one of the nicest people to work for. My best wishes to her family and friends.
Learn How to Improve Your Chances of Obtaining Shareholder Approval
Today, the NASPP is conducting a webcast – The New Stock Plan Approval Rules—Immediate Action Items & Guidance – at 4 pm eastern time. The panel consists of Art Meyers of Palmer & Dodge, Ron Mueller of Gibson Dunn & Crutcher and David Drake of Georgeson Shareholder.
A surprising number of lawyers belong to the NASPP as it offers the most relevant compensation guidance around – take advantage of the no-risk trial to access the webcast live or by archive.
Odds & Ends
Today, the PCAOB is meeting to proposed audit documentation standards, among other matters.
Yesterday, the SEC posted the adopting release for its Rule 10b-18 modifications.
I have been hearing that US-based, multinational companies are having difficulties implementing their Codes of Ethics in overseas units. Some companies are getting pushback from employees in some countries just because their cultures do not lend themselves to this new type of oversight (particularly Italy, Spain, Germany).
The more serious issue is that local counsel are telling employees that forcing these types of codes upon them may generally violate local country laws (employee-protection types of laws), union agreements or can be viewed as a change in terms of their employment that cannot be made without consent/consideration.
In particular, these local counsel don’t like the fact that a Board of Directors can make changes to the Codes and those changes apply to them, regardless if employees agree (which is bizarre, because this has always been the way that general employee handbook provisions work). Please email me if you have had similar problems.
For TheCorporateCounsel.net subscribers, we have launched a “Code of Ethics” Portal, which is being managed by in-house lawyer Michael Goldblatt.
Nominating Committee Disclosure Proposal as the “Sleeper”
Under the SEC’s proposal regarding nominating committee activities, if the nominating committee received a nominee recommendation from a shareholder or group of shareholders that has beneficially owned more than 3% of the company’s voting common stock for at least one year as of the date of the recommendation, and the committee decided not to nominate that candidate, the company would be required to disclose the name of the stockholder that recommended the candidate and the specific reasons that the nominating committee decided not to include the candidate as a nominee.
I have long felt that this proposal was a “sleeper” and was receiving not enough attention compared to its more controversial sibling, shareholder access. At the PLI conference, my feelings were bolstered when Sarah Teslik, Executive Director of the Council of Institutional Investors, stated that she believes this disclosure proposal will be more effective in changing nominating committee behavior than the shareholder access proposal.
Later this week, the NYSE will be sending out emails to listed companies to help them understand what to disclose in their 2004 proxy statements regarding their obligations under the new governance listing standards. [Note that my early morning blog regarding relief for 10/31 FYE companies was not accurate.]
I also hear that the NYSE intends to roll out a web page on corporate governance by next fall.
Notes from PLI’s “SEC Hot Buttons” Panel
For TheCorporateCounsel.net subscribers, we have posted notes on the “SEC Hot Buttons” panel that featured Shelley Parratt, Deputy Director for Disclosure, Division of Corporation Finance and Norman Slonaker, Partner of Sidley Austin Brown & Wood.
We will be dribbling out more notes over the week as we clean them up.
’33 Act Reform – Is the End of Paper Nigh?
During one interesting segment of the PLI Conference, Bill Williams of Sullivan & Cromwell went over a potential framework of how it might look. Corp Fin Director Alan Beller noted that the SEC staff was working on a proposed framework and it was his belief (not speaking for the Commission) that it would be out “not too far in ’04.”
Regarding the ongoing “access vs. delivery” debate, Alan stated his belief (again, just his own beliefs) that the policy decision regarding whether investors had sufficient Internet access had already been made – so that delivery didn’t seem to make sense except for preliminary prospectuses in the IPO context.
By the way, the SEC staff is taking great pains to not use the ill-fated “aircraft carrier” terminology when referring to this ’33 Act reform project.
Governance Woes Continue on All Sides
In my humble opinion, one of primary problems with the SEC’s shareholder access proposal is that the governance practices of many investors are no better than those of public companies. That is now becoming all too clear in the case of mutual funds (check out today’s editorial by Nell Minow in the USA Today).
The recent disclosure of the $9 million compensation earned by TIAA-CREF’s CEO, Herbert Allison – who interestingly enough was just named to be on the NYSE new board – is another case in point. Here is what the NY Times said on Saturday:
“Some experts questioned the size of the package. Ashton McFadden, managing principal of James Beck Global Partners, a New York executive recruitment firm specializing in the asset management industry, said that a $9 million package put Mr. Allison on the high end of chief executive pay in the asset management industry, even considering the amount of assets TIAA-CREF manages. He also said that a $24 million severance package and a lifetime pension were unusual.”
Late yesterday, the SEC posted an approval order for the NYSE and Nasdaq governance listing standards that have been kicking around for more than a year.
Under the transition rules of these new standards, companies will be expected to begin complying with these new listing standards as of the earlier of their first annual meeting after January 15, 2004 or October 31, 2004, except as otherwise provided in the case of foreign private issuers, small business issuers, and initial public offerings.
Personal anecdote – I will be attending the annual PLI Securities Law Institute in NYC for the remainder of the week, with limited Web access, so you might not see a blog til Monday. We will be posting some notes from the conference then.
More on Financial Expert Determinations
My blog on Monday regarding how boards should determine audit committee members evoked a strong response from the community. Not disagreements – but additional commentary.
Brink Dickerson of Troutman Sanders notes that he has not been happy with the “self assessment” approach saying: “We tried it a couple of times, but in at least two instances it has yielded directors who say they are qualified and who then have to be gently told that they are not. It annoyed the both CEOs who were impacted, but fortunately the outside counsel was not blamed.
It has worked better when we have interviewed the purported financial expert candidates on behalf of the board. In several cases we have tasked an associate to call up the board member, run through the criteria, and generated a brief memo (two to three pages, at most) to the board describing the criteria and his/her conclusions so that the board has a nice summary to rely upon.
Since the associate is not intimately familiar with the members’ background — and we have intentionally picked associates who are not — he/she can apologize at the beginning of the call for being ignorant and then ask a bunch of “dumb” questions. It is a lot harder for the general counsel or someone at the client to do that. All in, it seems to be about two hours of work, and so far has generated happy clients.”
Shareholder Communications with Directors
In the near future, the SEC intends to adopt its proposal that would require companies to disclose various aspects of how its directors communicate with shareholders – the SEC intends to have companies make this disclosure in the upcoming proxy season.
In one of our more informative interviews, learn from Rich Koppes – who has dealt with this topic both as a shareholder (former GC of CalPERS) and as a director – what companies might consider doing and the ramifications of establishing more communication between these two corporate behemoths in Rich Koppes on Directors Meeting with Shareholders.
PCAOB Issues Briefing Paper on Non U.S. Auditors
Last week, the PCAOB issued a briefing paper that describes the broad parameters of its approach to the oversight of non-U.S. accounting firms, a controversial topic that I have blogged about several times. This briefing paper describes the PCAOB’s plans for oversight of non-U.S. registered public accounting firms, based on cooperation with appropriate non-U.S. auditor oversight authorities, including:
– A framework to permit varying degrees of reliance on a firm’s home country system of inspections, based on a sliding scale (i.e. the more independent and robust a home country system, the higher the reliance on that system).
– A modification to the PCAOB’s registration form to permit, where applicable, the inclusion of certain information about a non-U.S. firm’s home country oversight system, in order to facilitate coordination between the PCAOB and non-U.S. oversight systems.
– A 90-day extension of the April 2004 deadline for non-U.S. firm registration to allow sufficient time for the PCAOB to have final rules in place in this area, as well as permit non-U.S. firms a reasonable amount of time to understand and prepare for registration.
