ON Securities : Securities Lawyer & Attorney for Corporate Governance & Executive Compensation Matters

"Psst - Wanna Buy Some (D&O) Insurance?" This Survey Will Help.

I was interested to read the most recent Towers Perrin survey of D&O insurance practices of around 2,600 public and private companies and non-profits. One of the purposes of the survey is to provide companies with information about the structure and cost of D&O insurance practices of a broad cross-section of companies. Towers Perrin emphasizes that the companies surveyed do not represent a scientific sampling. However, it is helpful to have a reference point for the range of coverage amounts and retention amounts for companies of various sizes.

This survey also reports on various insurance trends, including an increasing number of public companies purchasing only "Side A" coverage, which covers directors and officers only in situations where indemnification from the company is not available. This trend was especially apparent in very large organizations.

More From the Deloitte Executive Compensation Trends Presentation

Last week I mentioned the excellent materials prepared by Deloitte Tax for a presentation on trends in executive compensation, for the Twin Cities Chapter of the National Association of Stock Plan Professionals. A few other compensation trend observations worth noting:

Around 40% of the largest companies changed their long-term incentive (LTI) plans or granting practices for 2009, including modifying performance measures, reducing LTI grant values, introducing intermediate goals, etc.

The authors predict a significant decline in LTI grant values for 2009 - in light of lower stock prices, some companies had to reduce grant values in order to manage equity dilution.

Surveys noted significant increases in executive compensation "clawback" arrangements for large companies.

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Last week, the Twin Cities Chapter of the National Association of Stock Plan Professionals hosted a presentation on hot topics in executive compensation, led by Tara Tays and Rive Rutke of Deloitte Tax. I have included their PowerPoint under the Resources section of this blog, and in a future post I will discuss some of the compensation trends they reported.

One of the hot topics covered by the presenters was compensation risk analysis. They presented a very high-level summary of steps a company should consider - see pages 12 and 13 of the PowerPoint. Financial institutions receiving TARP funds are already required to do this analysis; for other types of companies, they may not yet have initiated a formal risk analysis process, monitored at the Compensation Committee level.

As I discussed previously, if the SEC adopts its proposed amendments to the proxy rules, each public company will be required to disclose in its proxy statement how its overall compensation policies for employees (including compensation of non-executives) create incentives that can affect the company's risk level, and its management of risk. The disclosure is required if the compensation policies create risks that may have a "material adverse effect" on the company.

Comment: The bottom line is that the proxy rule amendments requiring this risk disclosure may be effective in the upcoming proxy season. Public companies should start thinking about the analysis that must be completed by then, in order to be able to make a well-founded statement in the proxy statement. The recommended steps in Deloitte's flow charts will not apply to all companies, but at least they provide a benchmark for companies that have already started the process, or a starting point for those that have not.

What do you think of Deloitte's recommended approach? Do you have any tips to share? Send me an e-mail, or post a comment below. And be careful out there - it's a risky world.

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I just went through some of the hundreds of comment letters on the SEC's controversial proposal to adopt Rule 14a-11 on proxy access. The rule would grant large shareholders the ability to include director nominees in management's proxy statement - see the description at the end of the ON Securities Cheat Sheet. A companion rule, a proposed amendment to Rule 14a-8, would explicitly allow shareholders to include proposals in the proxy statement to approve various forms of proxy access.

Several comment letters, including the letter from the U.S. Chamber of Commerce, describe explicit theories about why the proposed rule should be struck down by the courts if adopted. Generally, these letters claim that the rule exceeds the SEC's authority or preempts state law. One of the most interesting letters is from Stanford Professor Joseph Grundfest, a former SEC Commissioner. Grundfest focuses on the major contradictions he perceives between the SEC's stated goals in its proposing release and the provisions of the rule itself:

. . . Like Charles Barkley's claim that he was misquoted in his autobiography, contradictions spawn skepticism as to the credibility of an entire enterprise.

Professor Grundfest then describes how these inconsistencies could be the basis of a legal challenge to the rule.

It seems apparent that, if the SEC adopts Rule 14a-11, the enforcement of the rule will be tied up in court, and the rule could eventually be struck down. This leads to a couple of likely scenarios involving Rule 14a-8:

The SEC could adopt both Rule 14a-11 (with the same 3-2 vote as for the proposal) and the amended Rule 14a-8, risking a legal challenge. The amended Rule 14a-8 will serve as a backup that will almost certainly not be subject to a legal challenge. As described in this post, Delaware law was recently amended to specifically permit such bylaw amendments.

On the other hand, the SEC could back down and just adopt the proposed amendment to Rule 14a-8 (possibly with a 5-0 vote). This is the compromise suggested by the National Association of Corporate Directors, which opposes Rule 14a-11 but supports the amendment to Rule 14a-8.

Either way, the amendment to 14a-8 is likely to be effective long before Rule 14a-11. This will give activist shareholders an avenue to start the process of demanding shareholder access through shareholder proposals at annual meetings to amend company bylaws. One way or another, it won't be long before we hear the big shareholders "knock-knock-knockin' on the boardroom door".

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The news today was filled with reports on the first anniversary of the collapse of Lehman Brothers. That event represented the first time most of us realized the extent of the financial disaster that played out over the following few months. Not exactly cause for nostalgia.

At around the same time, our local chapter of the National Association of Stock Plan Professionals (NASPP) produced a webcast/conference call entitled "Troubled Company, Workout and Bankruptcy Issues: A little 'gloom and doom' with your morning java." I moderated the panel discussion, which featured very topical discussions by Mike Meyer, a bankruptcy attorney with the Ravich Meyer firm, and Scott Feraro and Kathy Bonneville, compensation consultants with Seabury OCI Advisors, LLC. Obviously, this topic is just as relevant today as it was then. Just to keep on sharing the "gloom and doom", we have made the transcript available - it makes interesting reading. Topics included:

The role of compensation and risk management in the financial meltdown, and ways to structure compensation in a troubled company situation

Executive hiring, employment arrangements and retention in workout and bankruptcy situations - including the types of retention arrangements that will "fly" in bankruptcy court

Strategies in dealing with underwater stock options

Let's hope for a better year ahead.

SEC Enforcement Follow-Up

The SEC just got another incentive to ratchet up its newly aggressive enforcement posture another notch. On Monday, as described in this New York Times article, Federal District Judge Jed Rakoff issued a scathing order (see the link in the Times article) that voided Bank of America's $33 million settlement with the SEC. The enforcement proceeding related to Bank of America's failure to disclose the approval of Merrill Lynch bonus payments in the merger proxy statement. The judge was especially hard on the SEC's failure to go after the individual officers of Bank of America, accusing the parties of using the shareholders' money to reach a settlement that absolves the individuals of responsibility. If a new settlement is not reached and the case goes to trial, the judge will have plenty more opportunity to chastise executives, lawyers and public officials alike. It will be interesting to see whether the negative publicity causes the SEC to take its enforcement activity to yet another new level.

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Preview of Coming (Regulatory) Attractions

The past few weeks have been fairly slow in terms of new developments in securities law, corporate governance and executive compensation. However, summer's over, and I'm expecting a flurry in the next few weeks. Take a look back at the ON Securities Cheat Sheet - a lot of these developments are likely to change as we head into the fall:

Congress is back in session, and we are likely to see action on the Corporate and Financial Institution Compensation Fairness Act of 2009, passed by the House in July. Congress will likely try to reconcile that bill with the other legislation described in the Cheat Sheet, and I would expect that something will be enacted by the end of the year. Virtually every bill would require Say-on-Pay for public companies, but we don't know when the requirement will go into effect.

Comment periods are ending for the SEC's proposed proxy disclosure and solicitation rules and the proposed shareholder access rules. The SEC will almost certainly adopt the disclosure and solicitation rules this fall. As described in this post, action on the shareholder access rules is more uncertain.

The SEC and Treasury Department may further clarify compensation standards for financial institutions that received TARP funds - including the SEC's proposed rules to clarify Say-on-Pay standards for TARP recipients (maybe a preview of what Say-on-Pay will look like for other public companies).

Companies preparing their proxy statements for annual meetings held starting on January 1, 2010 will be dealing with the reality of the elimination of broker discretionary voting, described in this post.

We'll be watching carefully - as Siskel and Ebert used to say, "The Balcony Is Open".

Mastering the Art of American Blogging - and Begging

Last weekend I saw my all-time favorite film about blogging - okay, maybe the only film I have seen about blogging. "Julie & Julia" follows two parallel true stories - Julia Child's authorship of "Mastering the Art of French Cooking", and Julie Powell's creation of a blog that chronicles her quest to prepare all 524 recipes in the Julia Child book in one year.

I agree with the critics who said that the Julia Child story is much more compelling, and Meryl Streep is wonderful as Julia. But I watched Julie's story with my "blogger hat" on, and I tried to figure out what made her blog successful. Aside from a good concept and great writing, she found a way to create a community among readers with a common interest, and she fed off their support and feedback.

Which leads me to the begging - I am gratified by the number of subscribers to the ON Securities blog, but I'd like to hear from you a little more often. I know it's not always easy - as expressed in an e-mail I received from one subscriber who provided a great comment but then said:

I need a trip to the Wizard of Oz before summoning up enough courage to post a response.

I've paraphrased his/her comment anonymously in the "Comments" section of my last post.

So my request is that you not hesitate to give me feedback - let me know when I'm right or wrong or off base, or if there's any information you would like me to provide in this space. My promise: reading my blog won't leave you as hungry as watching "Julie & Julia" or reading Julie's blog.

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I spoke this week at a Minnesota CLE Conference on the topic of how public companies can avoid liability for their disclosures. In preparing my remarks, it struck me that the SEC is "loaded for bear" in going after public companies and their officers with investigations and enforcement proceedings. The SEC has increased and reorganized its enforcement staff and is trying to raise its profile - really, an attempt to justify the agency's continued existence. Recent examples, just during July and August of 2009:

A recent accounting fraud case against General Electric, where GE agreed to pay a $50 million fine.

The SEC's $33 million settlement with Bank of America for failure to disclose the approval of Merrill Lynch bonus payments in the merger proxy statement. The District Court is considering rejecting the settlement as too lenient, which the SEC is disputing.

The SEC's "clawback" action to recover $4 million in incentive compensation from the CEO of CSK Auto, reported here. It's not clear whether the SEC will be successful in this case. However, clearly, the SEC is trying to send a message to corporate officers that, if the officers are not vigilant to preventing accounting fraud and disclosure violations, their own compensation may be at risk.

This is all happening at a time when private lawsuits for securities fraud are getting more difficult for plaintiffs' attorneys to bring - a point of agreement for the plaintiffs' attorneys and defense attorneys on the panel. This does not mean company officials can relax, due to the increased scrutiny from the SEC and, probably, increased skepticism from judges and juries about public company practices. As I said in this prior post, this atmosphere should lead public companies to carefully consider their disclosure processes, including the disclosure controls and procedures required under SOX.

In other words, once again, "Don't Get Caught Cheating." Or, make sure you're not "BUSTED" by the SEC.

If you would like a copy of my PowerPoint presentation from this week, send me an e-mail. If you have any tips on disclosure procedures, or just want to weigh in on the SEC's newly found "mojo", post a comment below.

Have a great Labor Day weekend!

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