“I have heard very intelligent people assert, quite emphatically, that a charitable donation cannot trigger required disclosure, allegedly because it cannot be a transaction (“it’s only a gift”) for these purposes. I respectfully disagree. Determining whether disclosure is ultimately required under Item 404 involves walking through the entirety of the analysis behind the principle and the key objective (including whether a related person has a direct or indirect material interest) but I do not think there is anything in the language of the rule or in the principle that forecloses the possibility that a charitable contribution may be a transaction or a related person transaction. Remember the broad definition the Commission uses for “transaction” as well as the rest of the key objective behind related person transaction disclosure.
Imagine this hypothetical. A company makes a sizeable (that is, more than $120,000) donation to an environmental organization which the company’s CEO particularly likes. Is that a related person transaction that requires disclosure? Going back to our key objective, it seems attenuated to me, without more, to find a “direct or indirect material interest” for our hypothetical related person, the CEO, so disclosure may not be required. But it seems clear to me that it’s a transaction based on the Commission’s definition and discussion. It may be lack of materiality that precludes disclosure.
Check out this recent Form 8-K filed by Bank of America regarding their board’s adoption of by-law amendments and governance guidelines to implement majority voting for directors. The points that you may find of interest are the bylaw provision cannot be amended without shareholder approval and the governance guidelines with respect to director resignation, which are different from those that have been adopted by most companies (e.g. directors must agree to submit resignation in advance of next annual meeting). Here is the related press release – and the amended corporate governance guidelines.
Ken Wagner of Bank of America has just joined the webcast panel – “Shareholder Access and By-Law Amendments: What to Expect Now” – to explain why his company took the approach that it did.
“Ever since the recount of 2000, partisans of both parties have paid particular attention to everything from who votes to how they vote and how their preferences are recorded. Counting every vote is not only integral to our political life; it is central to our economic life as well. Shareholder capitalism enables our markets to thrive, our companies to grow and our economy to remain strong. And central to this system is the principle that shareholders can have a voice in the running of the companies that they own, that their votes will count.
This fall, the issue has been the focus of a series of court cases, decisions and now potential Securities and Exchange Commission action. How the SEC handles this can have a profound effect on the future of shareholder democracy, corporate governance and the future of our markets. It’s a matter of interest to all investors.
For years, shareholder advocates have been working to gain better access to companies’ proxies so that they can put forward resolutions and, most importantly, their own candidates for director slots. Even though boards of directors have improved considerably since the passage of new independence standards and disclosure requirements in Sarbanes-Oxley, the ability of shareholders to remove directors is critical when seeking to revive a moribund corporation. Yet currently, board elections are one-party affairs, with the incumbent board’s choices winning in virtually every case. Shareholders can only put forward candidates after costly proxy campaigns. A director has a better chance of being struck by lightning than losing an election.
In response, the SEC rightly decided to re-examine this issue and clarify the law. An open hearing on the topic was scheduled in October but was delayed until Dec. 13. The outcome of this session is critical to the future of shareholder capitalism. The signal the commission sends is an important one. Support of the AIG decision will make it clear that the reforms of the past few years were not ephemeral, and that even though the markets are once again delivering high returns, the commitment to good governance will not falter.
The upcoming meeting is the right time and place for the commission to set expectations for our public corporations. Indeed, an understandable desire for consensus on such a difficult matter is less important than the clarity of the SEC’s message. While passing an entirely developed proxy access plan may be too much to ask, the SEC can set a direction by making it clear that it will not ignore the issue of fairness that precipitated this latest litigation and put forward a series of steps that will strengthen shareholder democracy.
Part of this should include safeguards such as a minimum requirement of shares held in order to put forward director nominees. Other changes that can be made are: an increase in the number of exempt solicitations from 10 persons to 20 as long as those solicited are institutions or “accredited investors” so that investors can easily communicate with each other; the electronic transmission of proxy materials to those who desire them in that form, a move that can boost shareholder participation and reduce cost; and an endorsement of the principle of majority rule and schemes that bring this to publicly traded companies. A growing number of corporations have taken this last step, and it’s important for the SEC not only to allow but also to affirmatively promote it as a best practice — even urging the exchanges to include majority-voting among their listing standards.
From “The Rule 10b-5 Daily Blog“: Sarbanes-Oxley requires the chief executive officer and chief financial officer of a company to certify the accuracy of each periodic report containing financial statements. Plaintiffs often argue that these certifications can support the pleading of scienter (i.e., fraudulent intent) in cases alleging accounting misrepresentations.
From ISS’ “Corporate Governance” Blog: “The Globe and Mail had an interesting article the other day by Janet McFarland and Elizabeth Church titled “New Disclosure Rules to Reflect Evolving World.” The article states that Canadian investors will soon have the opportunity to learn more about executive pay packages as regulators prepare to revise compensation disclosure rules introduced more than a decade ago.
– Why does your survey come out so late compared to others?
– What was the driving force behind the large increase in CEO pay?
– What happened this year with restricted stock grants to CEOs?
– Are stock options going to play as large a role in the future as they have in the past?
– Why is the increase in CEO pay so much lower for small cap companies compared to larger companies?
From CorpGov.net: In 1990, out of the largest 500 American companies, 358 active CEOs served on outside boards filling 794 seats. As of June 2006, only 265 served on an outside board filling 376 seats, a 53% decline. CEOs who continue to serve have reduced their seats by 36%. Service on outside boards for CEOs of the largest 100 companies went from almost 90% to less than 60%.
Many reformers would be happy to have CEOs of their companies sit on another board to get such cross-fertilization of ideas, if the CEO of their board is nominated by shareholders of the other company. Board loyalties tend to be to those who brought them to the dance (to paraphrase Nell Minow). Its about time that at least some of the invitations go out from the owners.
According to the following excerpt from a Boston Globe article from Tuesday, President Bush said he is “astounded” by the size of some executive pay packages and urged companies to tie salaries to performance, while stopping short of advocating government action.
John Coffee, a professor at Columbia University School of Law, said at a recent ALI-ABA conference that he is an adviser to the panel and has suggested several reforms designed to mitigate the threat of securities litigation. According to the article, Coffee believes that in the “near future,” the Paulson Committee can be expected to make recommendations “to impose limits on securities class actions” and that the “SEC could take some action to change the role of [the] securities class action” in the next 6 months.
2. “Stock drop” cases could be moved out of the courts and into the arbitration arena.
The Paulson Committee’s recommendations are due out by the end of November 2006. If either of these ideas are among them, look for a barrage of deafeningly loud disapproval from the plaintiffs’ bar and consumer groups…. Stay tuned.
Yesterday, the NYSE filed this proposal with the SEC to amend Rule 452 and eliminate broker discretionary voting for director elections (as such elections would no longer be considered “routine”) for any shareholder meetings held on – or after – January 1, 2008. The proposal is subject to approval by the SEC.
The NYSE’s proposal dovetails with a set of recommendations from its Proxy Working Group issued in June. Surprisingly, the proposal notes that the NYSE didn’t receive any comments on the Proxy Working Group’s recommendations (although the NYSE Staff only had solicited comments back in June to share with the SEC, not the public). Interesting that the NYSE acted so soon, given that it was reported that this proposal would be postponed just a month ago.
Please take a moment to participate in both these surveys.
As I blogged a few months back, the NYSE amended Section 203.01 of its Listed Company Manual regarding the provision of annual financial reports to shareholders. The amended rule is intended to allow listed companies to satisfy the NYSE’s annual financial statement distribution requirement by a website posting of a company’s Form 10-K (but this only benefits foreign private issuers until the SEC adopts e-Proxy and amends Rule 14a-3).
“Companies have asked whether they can still satisfy the NYSE’s requirements by traditional physical delivery of the annual financial statements, without the necessity of making the website postings and simultaneously issuing a press release as provided for in the amended rule. The answer is yes.
On the heels of our survey on whether dissemination of material information through the Web satisfies a company’s Regulation FD obligations, Sun Microsystems CEO Jonathan Schwartz – who is one of those rare CEO bloggers – has asked the SEC to allow companies to disclose significant financial information through blogs. Mr. Schwartz’ letter to the SEC is copied in his blog.
Reading the latest details about how H-P’s hired gumshoes closely followed a WSJ reporter gave me the shivers. Folks, feel free to sift through my trash anytime – trust me, there’s nothing in there too interesting save maybe some old boxers (my wife is now applying a one-year rule).
In our “Board Duties” Practice Area, I just posted a sample director confidentiality agreement contributed by a member.
This question will be posed to the panel during our upcoming webcast, “The Art of Boardroom Etiquette and Confidentiality.” During a recent prep call I held with the panel, most agreed that entering into confidentiality agreements with directors is a bad idea – because directors already are bound by their fiduciary duties and thus there is no reason to bind them with contractual obligations. On the other hand, the use of agreements can be useful to remind directors that their obligations to the company are very real. This issue will be discussed during the webcast, but I’d be interested to hear your own thoughts on this practice.
Did you catch the numbers for Friday’s record-breaking IPO of Industrial & Commercial Bank of China? Not only did the IPO raise $21.9 billion, the total volume of orders was $430 billion! $350 billion of demand from global investors and $80 billion within China. Mind-boggling! And according to this WSJ article, demand for Chinese IPOs has been stimulated all year; last month, China Merchants Bank had $100 billion of demand for its $2.4 billion IPO.
As Pat McGurn of ISS notes, investors are chanting “I want my MTV,” meaning majority threshold voting standards. He predicts that over 200 companies will receive shareholder proposals calling for majority vote standards to be adopted; over 150 were submitted this year and they garned average support levels of 47%. As noted below, and as will be discussed during our upcoming webcast: “Shareholder Access and By-Law Amendments: What to Expect Now” – the first proposals seeking shareholder access have been submitted (as well as the first letters to the SEC opposing access, see this Business Roundtable letter that I just posted in our “Shareholder Access” Practice Area).
From the ISS Corporate Governance Blog: “Four pension funds this week submitted a resolution that seeks to allow shareholder-nominated candidates to run for seats on Hewlett-Packard’s board of directors. This was the first proxy access proposal filed after a Sept. 5 federal court ruling that the Securities and Exchange Commission improperly allowed American International Group to omit a 2005 access resolution by the American Federation of State, County, and Municipal Employees Pension Plan (AFSCME).
The proposal at H-P was filed Sept. 25 by AFSCME, the New York State Common Retirement Fund, the Connecticut Retirement Plans and Trust Funds, and the North Carolina Retirement Systems. The resolution asks the company to change its bylaws to allow any shareholder group holding 3 percent of the shares outstanding for at least two years to nominate one or more directors. Collectively, the pension funds own more than 30 million H-P shares with a market value of $675.9 million, according to their press release.
H-P had no immediate comment on the shareholder proposal. The Palo Alto, California-based computer manufacturer has been embroiled in a controversy over a boardroom leak investigation authorized by former Chairman Patricia Dunn. Dunn resigned Sept. 22, two weeks after the company acknowledged that it hired a private investigator to obtain the phone records of directors and journalists. The SEC, federal prosecutors, and California Attorney General Bill Lockyer are investigating the company’s handling of the leak probe, while U.S. lawmakers are holding hearings on the matter.
I know I can’t hide my grin today. Yesterday’s partial summary judgment from New York State Justice Ramos validates a lot of what our mission has been about on CompensationStandards.com over the past three years – at many companies, the process of setting pay levels has been broken for years. The fixes are relatively simple; the hard part is convincing CEOs and boards that the gravy train is over.
True, the NYSE is a New York non-profit and the circumstances are fairly unique – but the real message for me here is that the courts are “loaded for bear” when evaluating pay packages. Interestingly, Justice Ramos is presiding over the In re Viacom Inc. Shareholder Litigation case slated for trial in a few months.
“Among Justice Ramos’s findings: that the NYSE board wasn’t made aware of a huge chunk of the retirement pay Mr. Grasso was due and that Mr. Grasso had a duty to disclose that pay to the board. The justice also had harsh words for the board.
“That a fiduciary of any institution, profit or not for profit, could honestly admit that he was unaware of a liability of over $100 million, or even over $36 million, is a clear violation of the duty of care,” Justice Ramos wrote in a partial summary judgment, a pretrial ruling on certain aspects of a case. The case is particularly striking because the Big Board boasted an all-star roster of directors, including the chiefs of some of Wall Street’s largest financial companies, each of whom made tens of millions of dollars in annual pay.
Act Now: We continue to receive numerous requests for access to the video archive of last week’s “3rd Annual Executive Compensation Conference.” Apparently word is spreading – particularly about the need to take specific actions now – including implementing the three key analytic tools that need to be discussed in your upcoming CD&A.
You should watch the three separate panels on how to implement tally sheets, wealth accumulation, and internal pay equity – so that you will know how to disclose what your company is doing in these areas.
– Why would a company want to issue ESOARs?
– What are potential problems?
– What were the results of the Zions’ auction?
– What issues should companies consider regarding ESOARs?
– Are there other market-based approaches companies could consider?
“A new study by The Corporate Library of the 120 companies now implicated in the options backdating scandal finds new evidence that the practice of backdating stock options may have been spread by word of mouth through the network of directors sitting on the boards of more than one company. Director interlocking relationships now appear to be the most important governance characteristic and indicator of backdating problems.
The number of companies implicated in the options backdating scandal has more than doubled since The Corporate Library’s first report on this subject, rising from 51 at the end of June 2006 to 120 companies at the end of September 2006. At the same time, the number of companies with directors sitting on other companies implicated in the scandal has risen almost fivefold, from 11 to 51. The most important relationships involve several directors who served on boards prior to 2002, when most backdating activity occurred, and continue to serve now, including Scott Kriens and Stratton Sclavos. Kriens and Sclavos, for example, are responsible for the central position of Juniper Networks within the network of linked companies, and between them sit on four other implicated boards.
Yesterday, the SEC adopted long-awaited amendments to the best-price rule, Rule 14d-10, which brings the M&A world back to “normal” in the wake of conflicting decisions among the US Circuit Courts in this area during the past few years. Here is an opening statement from Corp Fin – and here is an opening statement from Chairman Cox.
Good News for Section16.net Members!
For the many of you that are members of Section16.net, we have just tweaked our database so that you can use your ID and password for Section16.net to access the thousands of pages of content on Section16Treatise.net.
We have made this switch now, since the two sites will be combined next year – creating an even more comprehensive resource for all your Section 16 needs. Try a no-risk trial for 2007 if you are not yet a member (and get the rest of 2006 for free) – or if you already are a member, renew your membership today (as all memberships are on a calendar-year basis).
A few members reacted to my blog on “stealth” restatements. Here is one of those reactions: “I saw the WSJ article on “stealth restatements” and pulled the Form 8-Ks referenced in the article. My take on it is that the SEC Staff, through the comment letter process, is “informally” changing its policy on when an Item 4.02 Form 8-K is required.
Feel free to weigh in with your own analysis or experiences on this one by shooting me an email.
Yesterday, the PCAOB Staff issued a set of 22 FAQs entitled “Auditing the Fair Value of Share Options Granted to Employees.” The FAQs address auditing the fair value measurements associated with determining compensation cost. It highlights risk factors that auditors should be aware of and addresses the auditor’s consideration of the process for developing a fair value estimate, significant assumptions used in options pricing models, and the role of specialists in fair value measurements.
Next Tuesday, catch Jim Freund, Mediator and former Partner of Skadden Arps Slate, Meagher & Flom LLP – and one of the foremost M&A lawyers of any generation – in the DealLawyers.com webcast: “M&A Dispute Resolution: Getting Deal Lawyers Into the Game.” Settling the all-too-frequent post-closing disputes spawned by M&A deals is too important to be left solely to the litigators! Transactional lawyers should step up to the plate to help achieve commercially-sound solutions through negotiation or mediation.
Last week, Sovereign Bancorp “fired” its CEO. You may recall that Sovereign Bancorp was last year’s “governance posterchild of the year” in my humble opinion. Of course, I use the term “fired” loosely since the company’s board didn’t remove the CEO “for cause” – why do that when you can pay the guy a bushel of the shareholder’s money on the way out the door? I pity Sovereign Bancorp’s shareholders.
“By all appearances, Jay S. Sidhu was forced out in the past week as chairman and chief executive of Sovereign Bancorp Inc. Under his employment agreement, that could allow him to walk away with a severance package valued at tens of millions of dollars.
If he jumped from the plane on his own volition as Sovereign says, compensation experts argue, Mr. Sidhu isn’t entitled to the golden parachute he appears to have gotten.
Nobody expected this to keep Mr. Sidhu from securing a rich goodbye package. His contract doesn’t include poor performance as a reason to deny him severance, so pay experts say he deserves the money if he was effectively fired. And Sovereign is hardly the first company to gloss over the reasons for an executive departure. But critics in the corporate-governance community say the company’s story should match its actions.
“It isn’t acceptable if he is being terminated to say that he is leaving voluntarily, nor is it acceptable for the company to pay him severance if he is leaving without good reason,” says Paul Hodgson of research firm Corporate Library. A Sovereign spokesman declined to comment. Mr. Sidhu didn’t respond to requests for comment.