Last Friday, Microsoft filed its 10-K. You can’t glean any new details about its restricted stock unit program or option arrangement with JP Morgan – but it does provide the retroactive application of SFAS 123 to expense options.
By the way, we have posted a partially “blurred” version of the most recent issue of The Corporate Executive – which contains 6 pages of comprehensive analysis into what Microsoft is doing – in the hopes that you will enter a “no-risk” trial (current subscribers can access the complete version online).
The SEC’s August 2003 proposal regarding nominating committee activities would require companies to describe any specific, minimum qualifications that the nominating committee believes must be met by a nominee, any specific qualities or skills that the nominating committee believes are necessary for one or more of the directors to possess, and any specific standards for the overall structure and composition of the board. As proposed, this disclosure would be required in proxy statements.
Some companies already provide this type of information, either in the board’s corporate governance guidelines or nominating committee charter. Now, some companies are providing their criteria in their proxy statements or posting it separately on a page of their websites. For example, Oracle provided such a description in its proxy statement filed yesterday and Johnson & Johnson has a separate web page explaining its criteria.
For those that took a gander at the Procter & Gamble proxy statement I blogged about yesterday, did you notice that they appended seven committee charters and their corporate governance guidelines! Seven charters is a lot…could be the record…
As I blogged a few weeks back, the SEC’s FAQs regarding auditor independence likely will cause many companies to revise their pre-approval of audit/non-audit services policies. As more fully laid out in our Pre-Approval Policy samples page, the FAQs make it clear that pre-approval policies can’t provide for broad, categorical approvals (e.g., tax compliance services); that the pre-approval policies must be detailed as to the particular services to be provided; that the audit committee must be informed about each service; that monetary limits cannot be the only basis for the pre-approval policies; and that if the audit committee is presented with a schedule or cover sheet describing services to be pre-approved, a schedule must be presented with detailed back-up documentation regarding the specific services to be provided.
Now, Procter & Gamble has become the first company to post/file a policy since the FAQs were issued – and provides an indication of how much more the audit committee (or a delegated member(s) of the committee) is going to be involved than previously thought in pre-approving services. We will continue to add these policies to our Pre-Approval Policy samples page as they are made public.
For TheCorporateCounsel.net subscribers, we have posted an interview with Betsy Atkins about Life as a Professional Director.
A recent study by ISS – using the ISS definition of independence – shows that the media industry has the least degree of independence in the make-up of its boards while utilities ranked best.
Media companies ranked last in comparing wholly independent audit and compensation committees, and second-to-last for nominating committees. The industry also ranked last when ranking where entire boards comprised at least 75 percent, or 50 percent, independent directors. Still, the media could claim the lowest percentage of staggered boards within an industry.
Utilities topped the lists for wholly independent compensation and nominating committees, as well as the 75-percent and 50-percent benchmarks for total board comparisons. But two-thirds of utilities’ boards are staggered and the industry had the lowest percentage of companies with separate CEOs and chairs.
We already have a winner of most provacative comment letter to the SEC regarding shareholder access. Way to get your personal beefs in the public domain, Mr. Smith! And nice email address…
As noted in that webcast, the pros of doing so include the fact that the same auditors will be attesting to the controls later – so they are the ideal one to ensure they are “up to snuff” now. The cons of this approach is that independent auditors are limited in what they can do since they will be the entities that later attest to what is developed at their clients – and the SEC has warned that the auditor clearly must be independent when it provides its attestation.
Grant Thornton probably has made such a public announcement of its decision in a bid to attract companies that use one of the Big 4 as their auditors to hire Grant Thornton to perform their pre-attestation work. So far, many companies have hired their own audit firm to perform this service (which may be risky) – but some companies have hired other auditors to do so, including another Big 4 firm.
On September 11th, the SEC is taking its first foray into rulemaking in the Section 402 area to exempt qualified foreign banks from the insider lending prohibition along the same lines as domestic qualfied banks are exempt. Unfortunately, no further 402 rulemakings/interpretations are on the SEC’s horizon.
At the same time, the Commission will also consider whether to propose an amendment to Form F-6 that would add an eligibility requirement making the form unavailable to register American depositary receipts if the foreign issuer has separately listed the deposited securities on a registered national securities exchange.
For TheCorporateCounsel.net subscribers, thanks to Tom White and Connie Neigel of Wilmer Cutler & Pickering for adding model reporting-up policies – one for companies and one for law firms – as well as a model QLCC charter to our “Attorney Responsibility Portal.”
The September issue of Eminders is up – and so is a great interview with David Hardison of Fried Frank giving the “low down” on the SEC’s Auditor Independence FAQs. Below is one of questions that David handled:
Broc: You mentioned that some of the FAQs address the provision of non-audit services by accounting firms to their audit clients. Did the Staff use this as an opportunity to impose further restrictions in this area?
David: One could certainly argue that the Staff did. Under the January, 2003 rules, there were five categories of non-audit services, including bookkeeping, valuation services and actuarial services, that auditors are prohibited from providing to an audit client, unless it is reasonable to conclude that the results of the services will not be subject to audit procedures during the audit of the financial statements.
The question then becomes “When is it reasonable to the conclude that the results of a non-audit service will not be subject to audit procedures.” In the FAQs, the Staff rejected the seemingly plausible view that, if the non-audit services were to be provided to a clearly immaterial subsidiary or segment of an audit client’s business, one might reasonably conclude that they would not be the focus of audit attention and that the potential concern that the auditor would be placed in the position of engaging in “self review” would not arise. Instead, the Staff’s position is that the process that an auditor undertakes to decide which portions of a client’s business are immaterial is itself an audit procedure.
As a result, before deciding whether there are ever circumstances in which an accounting firm can provide these types of non-audit services to an audit client, the firm and the client’s audit committee will need to focus on the nature of the services themselves, and not on the size or importance of the entity within the corporation.
As a former head of the NYSE, SEC Chair William Donaldson has taken offense with the pay package of current NYSE head Dick Grasso and has demanded details of what is involved. Chair Donaldson says that the NYSE chair should be paid more like a regulator and not like the CEO of a financial services firm. Not much room for disagreement there…
My hunch is that a “town hall” website for shareholders to vote on proposals year-round – as recommended in Breeden’s MCI bankruptcy filing – would not be used much by saavy institutional investors. Instead, those investors would continue to rely on the Rule 14a-8 process and submit shareholder proposals in the normal course. This is because those investors often have other agenda items they wish to discuss with management and the proposal is more of a “calling card” to open a dialouge.
In many cases, investors will withdraw their proposals after satisfactory talks with management before the proposals are ever publicized. The ability to use a proposal as leverage to enter into broader negotiations would not exist with the town hall website because once posted, the proponent arguably would no longer be able to control the destiny of the proposal (although we have not seen details about how the town hall site would work, the logic is that once posted, all shareholders would have an interest in it).
Instead, the town hall website likely would be used primarily by retail investors and perhaps by institutional investors at companies that either are generally unresponsive to reasonable shareholder requests or have pressing performance issues.
For TheCorporateCounsel.net subscribers, we have posted a sample “reporting up” policy for law firms in our Attorney Responsibility Portal.
The Occupational Safety and Health Administration has posted a compliance directive updating its Whistleblower Investigation Manual to cover two more statutes. The directive, DIS-0-0.9, adds two chapters and updates others to provide guidance on investigating whistleblower complaints under the Corporate and Criminal Fraud Accountability Act of 2002 (Title VIII of the Sarbanes-Oxley Act of 2002) and the Pipeline Safety Improvement Act of
2002. The manual is the primary vehicle for disseminating policy, procedures and information to whistleblower investigation staff.
For TheCorporateCounsel.net subscribers, we have posted a memo by Marty Lipton railing against the Breeden report as detailed in a blog yesterday by Mike O’Sullivan.
The battle over the executive compensation practices at Siebel Systems looks like its coming to an end with the settlement of a lawsuit brought by the Louisiana Teachers’ Retirement System – yet another sign of how far institutional investors will now go to rein in excessive compensation, particularly in Silicon Valley. Siebel in particular has been targeted for quite some time by a variety of investors, including the AFSCME.
One of the more curious governance reforms in the Siebel settlement is the committment to provide better disclosure about how the compensation committee makes its executive compensation determinations. Its not clear if this means that the committee will provide more details in its report than required under Item 402(k) of Regulation S-K – but a cursory review of Siebel’s 2003 Comp Committee Report shows that its current disclosure practices are not too far off the norm. So investors – and perhaps the SEC staff – may well be paying closer attention to these reports next proxy season.
With the SRO corporate governance proposals likely to be adopted in the near future, we have started posting sample board committee evaluations on TheCorporateCounsel.net, starting with audit committee evaluations.
We have posted the 156-page Breeden MCI report, which I am labeling the “Grand Corporate Governance Experiment” as it recommends a number of mechanisms that have been debated but not tried. A prime example is the concept of the “town hall” website where shareholders can organize to present proposals to management. Here is Breeden’s recommended format:
“The Governance Committee should establish a website that will offer shareholders a “town meeting” forum for discussion of issues of concern. One or more shareholders representing at least 1% of the voting power of the Company should be entitled to place resolutions on the website for consideration of all shareholders, irrespective of whether such resolutions would be deemed appropriate for the Company’s proxy statement (based on considerations of whether such resolutions involve matters of ordinary business or otherwise). The Governance Committee should establish criteria for the times of submission of such resolutions, and the time and manner of recording votes of shareholders regarding any such proposals. Any such proposal that receives a minimum vote to be set by the Governance Committee (such as 20%) should be placed by the Company on its next proxy statement. It should be the general policy of the Company to solicit the views of shareholders on issues of concern to them on an active basis.”
As I recalled with Bill Morley yesterday, this concept is nothing new. The staff had debated over this concept back during the 1998 amendments to Rule 14a-8 and the staff’s July 15th report asks whether “solicitation should be facilitated by electronic means on one or more websites.” George Kobler floated this concept also in “Shareholder Voting over the Internet: A Proposal for Increasing Shareholder Participation in Corporate Governance,” 49 Ala. L.Rev. 673 (Winter 1998) – albeit without any real legal analysis.
As usual, the potential problems with this approach will be more evident once MCI flushes out – if they follow this recommendation – the details left unspoken by Breeden’s recommendation. This framework is potentially quite costly, both in terms of dollars and management’s time. First, there is the technology cost of setting up the website that contains mechanisms to allow voting, etc.
In fact, I believe only the largest companies could operate such a website as it will take quite a bit of time to qualify shareholders and keep tabs on what is being posted and prepare reports for senior management. This easily could lead to the corporate secretary’s department hiring an additional staffer and would burden inhouse securities lawyers with a heavier load.
Management then would need to determine whether to run their own solicitation campaign against these proposals – and how to deal with false and misleading information posted on the website. Without the SEC staff to act as referees, its probably inevitable that proponents would make more false and misleading statements than they already do (and its unclear whether Rule 14a-9 would apply until more details are known). If the company’s website ends up hosting a “spitting match” between a group of proponents and management, this is sure to draw the media’s attention. More to come…
Whoa, the 78 suggestions filed by Richard Breeden, the court-appointed Corporate Monitor for MCI, with The United States District Court for the Southern District of New York to improve MCI’s corporate governance includes some real “doozys.” They surely will be fodder for much commentary in this blog and elsewhere for some time to come. Among them:
– placement of most of the board’s corporate governance guidelines within the company’s Articles of Incorporation, so that only shareholders can amend them
– establishment of a website “town hall” for shareholders to vote upon resolutions at any time of the year – and without the restrictions imposed by Rule 14a-8; with a mechanism to have certain of these resolutions then placed in the company’s proxy statement for a vote (i.e. so Rule 14a-8 restrictions can effectively be avoided)
– ban on stock options for 5 years; to be replaced by the use of restricted stock (see Microsoft)
– at least one new director elected each year, with a mechanism for shareholders to nominate and hold a contested election potentially each year
– mandatory rotation of independent auditors every 10 years
– 10 year term limits on directors
– maximum limits on executive compensation (any amounts in excess must be approved by shareholders) and elimination of most retention grants
