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.
The November issue of our complimentary email newsletter is posted – sign up for it today by just inputting your email address and clicking a button!
ABA Comments on Possible Retroactive Application of Shareholder Access Proposal
Yesterday, members of the ABA’s Federal Regulation of Securities – those that comprise the Task Force on Shareholder Proposals – submitted a comment letter to the SEC objecting to the use of the Rule 14a-8 requirements to the opt-in requirements of proposed rule 14a-11 – as well as objecting to the possibilitity that the proposed triggering event that consists of a 35% withheld vote could be effective before the SEC adopt a final rule.
Essentially, these members of the ABA are saying that the proposed rule should be finalized so that the parameters and implications of an opt-in proposal or withholding of votes is fully understood before shareholders are asked to take action. The 12-page comment letter is in the form of interim comments, with more extensive comments on the proposing release to come later.
This comment letter is not yet on the SEC’s website, but we have the letter posted in our “Shareholder Access Portal.”
FASB Defers SFAS 150 Provisions Relating to Mandatorily Redeemable Noncontrolling Interests – and Requires Restatements in Some Cases
Last week, the FASB decided to defer the application of paragraphs 9 and 10 of SFAS 150 as they apply to mandatorily redeemable noncontrolling interests. Those paragraphs require that mandatorily redeemable minority interests be classified as a liability on a parent company’s financial statements in certain situations, including when a finite-lived entity is consolidated.
This deferral is expected to last so long as they are addressed in either Phase II of the FASB’s Liabilities and Equity project or Phase II of the FASB’s Business Combinations Project. No early adoption for noncontrolling interests is allowed during the deferral period – and any financial statements that have applied these paragraphs must be restated. Ouch!
One question that I keep getting is what processes should a board use to make its “audit committee financial expert” determination. Faegre & Benson recommends the following process (with the caveat that each company’s circumstances may require a different process):
1. Send Audit Committee Questionnaire to audit committee members and have them returned prior to board meeting. Circulate the completed questionnaires to all directors prior to the board meeting.
2. Have the General Counsel do some analysis of the completed questionnaires against the criteria prior to the board meeting to help the board figure out if there are additional questions left unanswered by the completed questionnaire that would require further inquiry, etc. and present analysis to all directors at the board meeting.
3. At the board meeting, directors could then discuss the completed questionnaires and ask additional questions to get information they need to complete their assessment and use the analysis table to walk through the definition of an “audit committee financial expert.”
Overall, the audit committee should agree which of its members shall be suggested to the board as the “financial expert” – and from a practical perspective, a director should not be identified as a financial expert without their consent. Management nor nominating committees should play much of a role in this process (other than assistance from the General Counsel or outside counsel in asking the right questions and conducting a review of the questionnaires – or recruiting a new director that qualifies as a financial expert).
For TheCorporateCounsel.net members, in our “Audit Committee Portal” – courtesy of Faegre & Benson – we have posted a sample audit committee questionnaire, a board resolution regarding a financial expert determination and a spreadsheet with the financial expert criteria that audit committee members can use to help analyze prospective financial experts. In addition, we have other sample D&O questionnaires available.
Y2K All Over Again?
One readers shares: While surfing to Oracle Corporation’s website for technical information, I was startled to see Sarbanes Oxley prominently featured on Oracle’s homepage. You might call it a new high water mark for the hype that has built around SOX that the same vendor that promised us Network Appliances in the 90’s, and reassured us at the millennium that its technology would ward off the perils of Y2K is now offering us white papers on governance and invites us to “Learn how Oracle’s powerful differentiated capabilities can help you meet the demands of the Sarbanes-Oxley Act.”
Crisis in Mutual Fund Industry
As Pat McGurn of ISS noted in our recent “Wildest Proxy Season” webcast, mutual funds often are the “swing” vote in a close vote. In addition, the SEC’s recent proposal on shareholder access will undoubtably make the votes cast by mutual funds even more important.
That’s one reason why the governance failures at funds are so scary. The reforms that companies have undergone over the past two years pale next to the ones necessary to fix governance in the mutual fund industry. Yesterday, the NY Times ran two good articles on the topic – one about the excessive compensation earned by Putnam’s CEO and one was an interview with John Bogle, the founder and CEO of Vanguard (who offered his own reform ideas – and noted that the all of the fund scandals have yet not been revealed).
“[S]hareholders gain an extra layer of protection because each mutual fund has a board of directors looking out for shareholders’ interests. Unlike the directors of other corporations, mutual fund directors are responsible for protecting consumers, in this case, the fund’s investors. This unique “watchdog” role, which does not exist in any other type of company in America, provides investors with the confidence of knowing that directors oversee the advisers who manage and service their investments.”
